US Outlook Report: Remain Calm and Carry On
What did our parents say again? Don’t sweat the small stuff? June U.S. economic data have come in a bit on the downbeat side with some high profile misses for retail sales and nonfarm payrolls at the same time that financial markets have been rattled by events overseas, specifically a possible Grexit and hard landing for China’s stock market if not for China’s entire economy. Yet we remain steadfast in our belief in our second half rebound forecast for the U.S. economy. Our advice: remain calm and carry on.
Our first observation is that despite the 0.3 percent drop in retail sales in June, consumer spending trends over a longer-time horizon appear solid. Key drivers of consumer spending from labor market conditions, real income growth, gasoline price declines, increases in household wealth, and declining debt levels, imply even more improvement in real consumer spending growth in the quarters ahead. Real consumer spending growth of around 3.5% at an annualized rate appears well within reach over the second half of this year, and there is a chance, if consumer optimism catches fire, that consumer spending could even outperform that pace over a brief period of time.
Second, the housing market rebound is showing no signs of slowing down. Homebuilders are in the catbird seat right now. On the demand side, buyer traffic is gaining pace as pent-up demand from traditional and first-time homebuyers moves to the foreground. Housing supply remains tight by historical standards and homebuilders are starting to realize they need to be building and selling more new houses. New home sales in May were 33% above year ago levels in the South and 26% above year ago levels in the West. June building permits, released this morning, are 30% above year ago levels and housing starts are up 26.6%.
A third cause for optimism is that despite financial market volatility in July, more regions of the world have started to see positive economic surprises. The tonic of looser global monetary policy is beginning to take effect.
Our inventory of downside risks for the U.S. economy is smaller than it has been in years, and there is a higher probability of an upside surprise from the consumer and housing markets than we have seen in some time. The first rate hike from the Fed will be coming before too-long (I think the first one would be appropriate in September). And when the Fed does finally pull the trigger, it is unlikely to be the end of the world, but an important marker that the U.S. economy is finally returning to some semblance of normalcy. Remain Calm and Carry On!
To find out more check out this week’s US Outlook Report.
Tags: economy