Bank of the West US Outlook Report for January 22, 2016

US Outlook Report: Keep One Eye on the Fundamentals

Periods of high financial market volatility and plunging oil prices like we have seen so far this year have a way of playing on your emotions. It’s easy to sour on the economic outlook when really your stock portfolio is what’s making you a little queasy.  It’s important to remember that the stock market and oil market are not the U.S. economy.


Adding fodder for the bears next week will be the release of U.S. Q4 real GDP.  We are expecting a weak print when the numbers come out next Friday.  Our current estimate is 0.8% GDP growth on an annualized basis. That’s pretty close to zero U.S. growth in the fourth quarter, since this is an annualized number.


We will likely see a measurable slowing in real consumer spending growth to around 1.8% from the third quarter’s 3.0% annualized pace. Retail sales were lighter than expected the last few months and December saw a sharp drop in unit vehicle sales. At the same time, recent construction reports suggest another contraction in non-residential construction, while business equipment spending growth slowed.  Given the strong dollar and weak growth abroad we also expect a sizable 2.5% annualized contraction in U.S. export growth on the quarter.


If that weren’t enough to overcome, inventory growth is slowing fast and the change in business inventories alone could shave another 0.8 percentage points away from the fourth quarter’s GDP estimate.


Now let me make the case why this isn’t the beginning of the end for the U.S. expansion.  First, the U.S. consumer is still in a good position to accelerate spending in the quarters ahead.  Real personal income growth is running well ahead of spending, personal savings rates have built up over the past six months, and plunging gasoline prices appear to be lifting consumers’ spirits.


Moreover, residential construction activity and housing will benefit from the continuation of low mortgage rates for a while longer.  And don’t forget about the government sector. The Bipartisan Budget Act of 2015 increased government spending for FY 2016 and FY 2017 by $32 billion and $35 billion respectively relative to the spending caps implemented under the Budget Control Act, according to the CBO.  This ensures government spending will remain an important support for real GDP growth over the next two years.


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

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