Growth, inflation and labour market all easing
The U.S. economy is growing at an above trend pace, with strong jobs growth. We expect the Fed to start raising rates in mid-2015. While there are signs wages growth is starting to strengthen, low inflation remains the main risk that may delay rate hikes.
The advance estimate for GDP growth came in at 3.5% qoq (annualised), a reasonably strong result considering that it included a negative inventory contribution. That said, our view at the time was that a couple of factors temporarily boosting growth in the quarter – a strong net export contribution and a spike in Federal defence spending – were unlikely to be repeated in the December quarter. In the event, it looks likely that the net export contribution will be revised away if the subsequently released September month trade data are any guide, with goods exports falling in September.
As a result, tracking estimates suggest that Q3 GDP growth may be revised down to around 3% when the second estimate is released later this month. Even if this were to eventuate, this is still a solid result as it is above the longer-term potential growth rate of the economy, and so is consistent with continued labour market improvement.
Moreover, business and consumer surveys remain generally positive. The ISM manufacturing surveys are at levels consistent with around 3.5% GDP growth. At the same time, while still below pre-recession levels, consumer confidence continues its recovery. Both the Michigan University and Conference Board consumer measures reached recovery highs in October.
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