Bank of the West US Outlook Report for October 23, 2015

US Outlook Report: Economy is Looking Better in October

Following August and September’s abrupt slowdown, the economic data points so far for October suggest the U.S. economy is picking up some momentum in the fourth quarter. This should help to raise expectations of a better Q4 GDP report and could make a December rate hike from the Fed a more likely scenario than the market is currently pricing in. Fed funds futures show an implied probability of only 36% for a December rate hike. Our current forecast is Q4 real GDP growth of 2.5% for the United States and a December rate hike from the Federal Reserve.  Moreover, our rate hike expectations from the Fed over the next two years are somewhat below the Fed’s September dot-plot median, but not as pessimistic about the prospect for future rate hikes as the futures market.

The reasons for our optimism over the fourth quarter’s U.S. growth prospects:

First, the U.S. consumer appears to be shaking off economic concerns from abroad.  A healthy labor market, lower energy prices, and continued low interest rates helped to boost consumer confidence in October.

So far the slowdown in job creation seen in the payroll report is not even visible in the initial jobless claims data, suggesting the labor market isn’t as weak as the headlines suggest and employers remain reluctant to part with their workers.  This is a healthy sign of resilient U.S. economic growth into 2016.

Housing and homebuilder data exceed expectations.  The NAHB housing market index for October hit expansion highs with big increases in present and future expected sales.

Lastly, the U.S. manufacturing deterioration may have moderated in October. The U.S. Markit and Kansas City Fed Manufacturing PMIs, the first PMIs released for October, showed notable improvement from a month ago. We will be watching other manufacturing PMI’s to see if manufacturing conditions are truly on the mend nationally.

Putting it all together, the fourth quarter is off to a good start. We expect 3.2% annualized real consumer spending growth in the fourth quarter and 10% annualized residential investment growth. Add a smaller drag from inventories, and U.S. GDP growth should rebound to around 2.5% annualized in the fourth quarter.

 

To learn more, check out this week’s US Outlook Report.

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