Economics trumps politics
Despite the surprising election result, the US growth outlook remains favourable. Delving into the detail, we find there is likely to be some rotation away from the consumer towards investment.
Our economics 'roadmap' had been tracking nicely in recent months. However, it is possible that the increased uncertainty from the surprise US election result has a negative impact on the outlook. However, our initial judgement is that a Trump presidency will do little to change near-term prospects. In the medium term, much will hinge on whether Trump pursues a pro-business or protectionist agenda. For this post, we will focus on the current underlying growth drivers.
- Inventories should add to growth
The first estimate of Q316 GDP was 2.9%, although this figure is likely to be revised over the next couple of months. This is a significant improvement from the first part of the year where inventories were a large drag. Inventories actually added to growth, as did net trade. The net trade contribution looks flukey, owing to a surge in agricultural exports which will probably reverse this quarter, but the boost from inventories is likely to persist into 2017 as there is still plenty of scope for them to return to more normal levels.
- Consumer spending continues to be a solid driver
Consumer spending slowed from over 4% in Q216 to 2% in Q316. As previously discussed in Ageing gracefully, household fundamentals are solid, but the tailwind from lower energy prices is now fading. Real income growth is unlikely to be much stronger than 2% in future, so unless the saving rate declines, consumer spending will struggle to grow faster than 2%. Within real incomes we still expect nominal wages and salaries to grow around 5%. This reflects a gradual improvement in hourly wage growth, but slower employment growth with payrolls averaging around 150k over the next few months.
- The energy bust is now likely to be over
Business investment grew marginally in Q316, but is still down around 1% over the last year. Energy investment has collapsed in recent quarters, but the good news is this drag is now over. It would take another plunge in oil prices to prevent this component from making a positive contribution to growth in future. But even stripping out energy, capex has undershot our models. We expect some recovery now the election is over, but the uncertainty has increased further given the result.
- The housing recovery could have further to run
Residential investment has also been surprisingly weak for the last couple of quarters, but here we have greater confidence of a rebound in the quarters ahead. Following an exceptionally deep bust, the housing recovery is still relatively early cycle. The glut of properties for sale has cleared and after several years of solid employment growth, household formation has picked up. Mortgage rates are low and rents have been rising, which should encourage an improvement in homeownership. Tight credit availability has constrained housing, but more recently banks have been loosening their lending standards for mortgages.
- Government spending should be mildly supportive
Government spending has also been soft recently. There has been some pick-up in Federal outlays, reflecting the fiscal measures passed by Congress towards the end of last year, but state and local government spending has been under pressure as revenues have been weaker than anticipated. These pressures are only likely to ease gradually, so in future quarters we expect only a modest positive contribution to growth from government spending. However, there now is an increased chance of a more aggressive fiscal stance, but that would likely take some time to take effect.
- Overall outlook is for moderate growth
Putting these components of GDP together implies above-potential growth at nearly 2½% for a the next couple of quarters before some slowing from mid-2017 onwards. We await the economic policies from the new President, but for now the steady US expansion continues.