U.s. Economic Backdrop Improves - 1894 Words

US Economic Backdrop Improves There is now increasing conviction in the view that Q1’s contraction to US real GDP was, in fact, transitory, as opposed to the onset of a new and slower growth trend. Special factors, such as bad weather, the labour dispute at West Coast ports, and statistical noise were all to blame for the negative outcome. Members of the Federal Open Market Committee (FOMC) are, therefore, relieved to be witnessing a generally better-than-expected tone to US economic data in recent weeks. These include higher automobile sales, although I suspect it will be a struggle to achieve much higher readings in the near future. Meanwhile, initial jobless claims continue to hover at very low levels. Respectable labour demand is now†¦show more content†¦This would have constituted a very modest recovery from Q1’s contraction. There has, however, been a recovery to +2.2%. It is, though, still below the Blue Chip Consensus estimate of +2.8%. Consumer spending is expected to be the larges t single contributor to Q2 real GDP growth, followed by business investment and government spending. Meanwhile, inventory liquidation will present, by far, the stiffest headwind, followed by net exports. Real final sales (GDP less inventories) will, according GDPNow, come in at just under +3%, a respectable reading. The best measure of domestic demand (final sales to domestic purchasers) will also register a gain of around +3%. In terms of assessing the risks of overheating and, therefore, rising inflation, the Fed looks at the growth of domestic demand vis-à  -vis supply-side developments in the economy. A few weeks ago, I alluded that both US productivity growth and labour force expansion were nothing to write home about during the current recovery. The supply-side of the US economy is certainly growing at less than +2% per annum, considerably below the underlying growth of aggregate demand. This implies that inflationary pressures should be slowly brewing. The Employment Situation report for June showed average hourly earnings rising just +2% on a year ago. On the surface, this is hardly the type of stuff that would send shivers down the spines