US: GDP back on trend? - ING

After a disappointing 1Q17 GDP outcome, today’s US 2Q figure should be much better, but for this to continue in the second half (and for the Fed to continue hiking rates) consumer fundamentals need to improve further, according to James Knightley, Chief International Economist at ING.

Key Quotes

“The initial reading for 1Q GDP was very disappointing, showing growth of just 0.7% QoQ annualised. This was subsequently revised up to 1.4%, but it remains well below trend and was largely attributable to poor consumer spending growth of 1.1% (initially reported as 0.3%) and a rundown in inventories, which subtracted 1.1 percentage points from the headline rate of GDP growth.”

“Today’s 2Q report is set to show a decent rebound thanks largely to a reversal of fortunes for consumption and inventories. We look for GDP to grow 2.8% annualised while the consensus amongst the 74 analysts surveyed by Bloomberg is growth of 2.5% (forecasts range between 0.9% and 3.2%). Business surveys (such as the ISM series) suggest we should be looking for a strong rebound while healthy retail sales, firm jobs growth and durable goods orders also support this view.”

“However, optimism regarding the second half of the year has softened in recent months due to the lack of progress on President Trump’s tax reforms. These were expected to result in significant tax cuts that would have provided added stimulus to both corporate and household spending. However, we are unlikely to see anything material on this until much later in the year and even then they are likely to be heavily diluted from what was originally planned – fiscal hawks oppose unfunded tax cuts, while failure on healthcare reforms have emboldened opponents.”

“This means we are looking to see if pay starts to respond to the tightening labour market. If so, real income growth can help fuel economic growth and the prospect of Federal Reserve interest rate hikes will become stronger. At the moment the market is barely pricing in one Fed rate rise over the next eighteen months versus the four the Fed has itself hinted at in its forecast update from June. We still forecast one rate rise this year (in December) with a further two next year.”