Economic outlook: risk of showers
10 July 2018
While the latest batch of data coming out of the US economy have been a little mixed, the overall picture remains one of an economy growing robustly. Starting with the soft spots: consumption was sluggish in May (0.0% m/m) following strong growth over the previous two months. However, despite this blip, spending still looks set to grow by around 3% annualised over Q2 as a whole, providing a healthy contribution to growth. Moreover, consumer confidence remains at multi-year highs, with few signs of recent market volatility or higher oil prices undermining sentiment. Manufacturing data also disappointed, with headline output down by a sharp 0.7% m/m in May, not helped by soft auto production. Some of this weakness was offset by rising mining activity, as higher oil prices boost the sector. In aggregate, industrial production was only marginally lower over the month and still up over the quarter so far. In other areas news has been more upbeat. While core capital goods orders (excluding defence and aircraft goods) have been choppy, the underlying trend continues to signal strong momentum in investment activity (see Chart 2). Meanwhile, net exports look likely to deliver a significant boost to growth over the quarter, with the real trade deficit having narrowed steadily in recent months.
More evidence of economic health is coming from the labour market. The latest payrolls report delivered another month of strong employment growth, with over 213,000 jobs created in June. Upward revisions to previous months’ jobs estimates further varnished these robust numbers. However, there are few signs in these data that firms are running out of prospective employees. Indeed, both the headline unemployment rate and the U6 underemployment rate ticked higher over the month, as more workers came into the labour force. While participation has been a little bumpy, and the latest increase may well prove temporary, this provides a reminder that labour market slack is difficult to measure. Certainly it could be the case that still low unemployment rate overstates the tightness in this market. Moreover, we could see the robust demand at present drag people back into the labour market more permanently (see Chart 3). The evolution of wage pressures will provide a good benchmark of these underlying conditions, and on this note the labour report showed only a modest 0.2% m/m increase in remuneration growth over June. Certainly these data are showing few signs of a breakout in wage pressures due to a tight labour market.
The combination of strong growth and gradually rising labour costs, support the FOMC’s slow but steady approach to tightening. Minutes from the June meeting struck an upbeat tone on growth, while members were increasingly confident around meeting their inflation objective. One fly in the ointment was trade policy. The minutes flagged that protectionist measures were already causing some contacts to delay investment in affected sectors and that risks from further escalation had intensified. Tariff increases that were large enough to disrupt the economy would force a wedge between the Committee’s inflation and employment objectives, with no guarantee that policy easing would be forthcoming.