• Recent partial data point to weak March quarter 2016 GDP growth. Labour market still strong.
• With business surveys starting to turnaround and financial conditions improving we have not changed our annual GDP forecasts (2.2% in 2016) but risks are to the downside.
• Corporate profits have been falling, mainly in the energy sector. Profit falls often – but not always – occur ahead of downturns. There are some important differences with past cycles – particularly Fed caution on lifting rates.

In last month’s Update we noted that after a soft end to 2015, the partial indicators were pointing to a turnaround. Some new data (for February) and some hefty revisions to historical data later, March quarter 2016 GDP growth is now tracking at only 0.7% qoq (annualised) according to the Atlanta Fed’s ‘Nowcast’. This is lower than the still soft December quarter 2015 outcome, which has been revised upwards from an annualised 1.0% qoq to 1.4%.

At this stage we are maintaining our forecast for annual GDP growth of 2.2% in 2016. This is on the assumption that data for the March month will show improvement and that Q1 weakness is transitory and likely to be made up in subsequent quarters. However, the risks are now clearly on the downside. Beyond the next quarter, another risk is coming from the downturn in corporate profits.

However, a more positive signal is coming from business and consumer surveys. The manufacturing ISM moved back above 50 in March (the non-manufacturing survey for the month is yet to be released) and has improved in each of the last three months. Consumer sentiment remains solid.

Moreover, financial conditions – which deteriorated markedly at the start of the year – generally continue to show improvement. The stock market has largely recovered its losses, the dollar has eased, and credit spreads are well down from their recent highs.

For further details please see the attached document

US Update – 4 April 2016 (PDF,125 KB)