Getting Back on the Normal Track

U.S. Overview
Getting Back on the Normal Track

With five years of GDP growth in the books since the end of the Great Recession, conditions finally appear to be returning to something closer to normal. While nonfarm employment growth fell short of expectations in August, our forecast for the second half of the year has been ratcheted up based on better data on international trade, the ISM surveys, construction spending and consumer confidence. We now expect real GDP to rise at a 2.9 percent pace in the third quarter and look for a 3.0 percent gain in 2015 and 3.1 percent growth in 2016. The next 10 quarters should mark the strongest run of economic growth since the middle part of the last decade. 

The improved economic performance reflects the lagged effects of stronger job and income growth, which along with lower gasoline prices should keep consumer spending on a solid trajectory. Business fixed investment spending also looks to be a little stronger and the economy is getting a big lift from increased energy production. Even the housing recovery should get back on track, albeit a very slow one. The age of fiscal restraint is also coming to an end, as improving tax revenues allow government spending to increase a bit. 

Stronger economic growth will also pull inflation and interest rates a little higher. But with the global economy struggling and commodity prices weakening, inflation should remain relatively modest, giving the Fed the freedom it needs to move cautiously and incrementally. As long as that message is telegraphed well, bond yields should also rise gradually. 

International Overview 
Weak Global Growth Continues, Risks Remain

As the U.S. economy has continued to grow at a relatively  strong pace, some large foreign economies have continued to experience important challenges that will limit their contribution to worldwide economic growth. Today, the U.S. economy can claim that it is growing mostly without help from the rest of the world. However, for the rest of the global economy that claim cannot be made as weak economic growth in the Eurozone is damping the prospects of better economic prospects. 

The recent move by the European Central Bank (ECB) to  further reduce interest rates and to start its Quantitative Easing (QE) program, a program that is coming to an end in the United States, underscores the weak economic environment in the region. Although we have seen some improvement in German economic activity during the first months of the third quarter, which should improve the region’s performance in the quarter versus a stagnant second quarter, the overall state of economic activity in the Eurozone likely will remain very weak and will not contribute much to overall global economic growth. 

Furthermore, a Scottish move toward independence, should it  occur, could wreak havoc on a European region that needs to get more certainty rather than less. This event could rekindle other secessionist impulses that have been brewing for centuries in the old continent and further increase the uncertainty of a sustained economic recovery.