During the past month all of the basic trends for the U.S. remained intact. In the economy the final revisions to second quarter data were inconsequential and monthly data ranged from good to better to beyond better. In the political realm things ranged from bad to worse to beyond worse. The upshot is that our forecast is slightly stronger for the next year than a month ago.
NIPA Data
The third release of data for the second quarter left estimated real GDP growth unchanged at 4.2%. Revisions at the sectoral level were equally insignificant. The basic configuration remains fully intact: overall growth is strong; consumption, business investment, and government spending are strong; housing is weak; trade is uncertain and probably distorted by tariff effects.
Recent Data
The overall strength shown in the Q2 data has mostly been reinforced by the monthly data released over the past month.
Sentiment indicators remain very upbeat. Consumer confidence rose 3.4 points in September following a large increase in August. Business sentiment as measured by the indexes from the ISM was also strong. Their non-manufacturing index rose to 61.6, which is the highest reading since its inception in 2008. Manufacturing declined a little, but at 59.8 remains in strong growth territory.
New data from August were mostly solid. Real income and consumption rose nicely, a sixth consecutive month of good increases. Likewise, industrial production had a moderate gain. Housing starts improved, but only relative to weak numbers in June and July.
Finally, employment data for September were pretty good. The establishment report showed only 134 thousand new jobs, but the previous two months were revised higher by 87 thousand. There was significant job creation in professional and business services, in health care and in transportation. On the goods producing side construction and manufacturing both added employment. The household survey reported unemployment fell to just 3.7%. This was accompanied by a steady participation rate. The unemployment rate is now at its lowest since 1969 during the Vietnam War.
Overall, the NIPA data and the monthly numbers are good enough to support our positive outlook for the next several quarters .
Baseline Forecast
As can be seen in the chart, relative to our outlook a month ago our updated forecast is a little weaker for the just completed third quarter and then a little stronger for the next three quarters. For the third quarter our model now puts growth at 3.5% down from 3.9% last month. Most of the change is due to a reduced assumption for inventory accumulation. For the four quarters through 2019:2 we now expect growth of 3.8%, up a tick from a month ago.
This 3.8% growth, if achieved, would be nearly a full percent above that realized over the past four quarters of data. But this increase overstates the underlying improvement in economic conditions. Most of the difference comes from a forecast swing in inventory change from negative to positive. Leaving this aside forecast growth is expected to gain from stronger housing and government, partly offset by an increase in the trade deficit. [The housing forecast may represent a triumph of hope (based on historical patterns) over recent experience.]
In the labor market the forecast has job creation continuing to run at its recent level of about 190 thousand per month through the end of next year. This is predicated on labor force participation holding at about its current level. This is consistent with the data for the past four years, but at odds with underlying demographic trends. We expect unemployment to bottom at just below 3.6% toward the end of next year. This could be too conservative .
Summary
We are reasonably confident in our forecast for the next year, although we think it may be a little tilted toward optimism. Stated differently we think the probabilities of downside deviation are larger than those to the upside.
This is even more so beyond the middle of next year. We see three major risks. In order of likelihood (as opposed to magnitude of impact), the first is the possibility that the fiscal stimulus we have in our forecast is overstated either in amount or duration.
The second is problems in the financial sector in the form of a stock market bust coming from some combination of Fed tightening and post-election political dysfunction.
Finally, there is the possibility of international problems related to the possibility of trade war and/or significant foreign economic slowdown (especially in China).
But for the next year the outlook is strong .