US economy will continue to grow at a moderate pace - NAB

Tony Kelly, Senior Economist at NAB, suggests that primarily driven by very strong consumption growth, US activity looks to have picked up in the June quarter, after a sluggish start to the year.

Key Quotes 

“Moreover, concerns over the health of the labour market have diminished after the June employment report.

This turnaround is also reflected in the ISM business surveys. The manufacturing ISM rose for the second consecutive month in June (taking it to its highest level since early 2015), and the non-manufacturing survey also bounced back from its May lull, reaching its highest level since November last year. At the same time, consumer confidence remains solid.

The main risks from the ‘Brexit’ vote comes from financial market disturbances – which are relatively muted at this stage – and from any contagion to the rest of Europe, with which the US has much larger ties.

We expect that the economy will continue to grow at a moderate pace. The recent experience has been one of growth driven by consumption and residential investment, while investment and trade have been weak. This should broadly continue although it is likely that there will be some convergence. The economy should also continue to benefit from a mild fiscal policy tailwind.

Despite the unemployment rate being close to the Fed’s estimate of the longer-run unemployment rate, and inflation moving in the right direction towards the Fed’s 2% target, we expect the Fed will remain on hold until December.

It was not so long ago that the Fed was strongly signalling a June or July rate hike. However, the very weak May employment report and then the uncertainty caused by the UK referendum has put paid to that. Fed officials have indicated that they are monitoring any fall out from Brexit, and it will take several months of data before they can assess this. Moreover, they appear very risk averse both to market developments but also to fluctuations in activity indicators (which are volatile in the best of times). We are also discounting the change of a rate hike in the November meeting as it occurs just before the US Presidential election.”