Key Points:

• The U.S. economy had a weak start to 2016, but we forecast it to rebound, with moderate growth expected through to 2018.
• Labour market still solid, despite slightly slower than expected April non-farm employment growth.
• Productivity growth in the U.S. remains weak, reflecting a variety of factors.

The advance estimate of US Gross Domestic Product (GDP) indicates that growth was very weak at the start of the year. GDP growth was only 0.1% qoq, or 0.5% annualised in the March quarter. As we noted at the time, the details were mixed with residential investment growth again strong and there was also a pick-up in public demand. However, the headwinds from business investment and net trade intensified, and there was a further slowdown in inventory accumulation.

However, quarterly GDP data are volatile and, due to a similar start to 2015, the annual growth rate remained at around 2% in the March quarter.

There are few indicators of actual activity available yet for the June quarter, although motor vehicle sales rebounded strongly in April, growing by 5.1% mom, reversing most of the previous months fall.

The ISM business surveys also point to a rebound in activity. While the manufacturing index gave up some of its recent gains in April, it was the second month in a row where it was in positive, above 50, territory (following five months below 50). The non-manufacturing index – which covers a far greater proportion of the economy – is at a higher level and rose for the second month in a row.

One possible explanation for the slowdown in GDP growth, and the deterioration in business indicators in late 2015 and early 2016 was a sharp deterioration in financial conditions, as measured by a broad range of indicators.

However, these indicators started to recover from late January and several are back to where they were around November last year. In the case of the US dollar, it is now around where it was in around mid-2015. The strength of the dollar has been a factor behind the weakness in several sectors of the economy, principally those more highly exposed to trade such as manufacturing.

For further details please see the attached document

• US Update – May 2016 (PDF,197 KB)