At the halfway point in 2015 we see reasons to expect solid U.S. economic growth through the second half of the year.
U.S. data at the end of the second quarter are encouraging. There is ample evidence of a pickup in economic momentum through Q2, after a weak Q1. Job growth remains strong. In June, 223,000 jobs were added to the U.S. economy and the unemployment rate dropped to 5.3 percent. House prices are going up. Household balance sheets are improving. Consumer spending is picking-up. The two-thirds of the economy comprised of consumer spending has a strengthening base.
The even better news is that economic momentum looks like it will carry over into the just-begun third quarter. Government spending looks like it will firm up as the limits of the federal spending sequester ease going forward, and strengthening tax revenue supports states and municipalities. Business investment slumped in Q1 but that too will improve as businesses respond to an improving domestic economy.
That gurgling sound you hear is the world awash in oil. U.S. production is still increasing, even though the drilling rig count is less now than half of what it was this time last year. U.S. inventories of crude oil are still historically high. Petroleum consumption is ticking up, but only marginally. Global production and storage are also at peak levels. We have revised down our expectations for WTI oil prices at the end of this year to $60 per barrel. This will keep gasoline prices low, adding to consumer confidence.
International conditions are mixed. We can say with near certainty that anything we say about Greece will need to be revised by next week. The referendum in Greece, to be voted on Sunday, appears to be as crucial as it is ambiguous, and that is an interesting combination. We expect Greece to remain in the Eurozone with ongoing support to its banking system by the European Central Bank. European financial markets are edgy. The odds of a financial calamity in Europe appear to be low regardless of the outcome of the Greek situation. However, uncertainty is the bane of confidence. And lack of confidence is not good for any economic system. And so the emerging economic momentum in Europe is threatened by chaos in Greece.
Meanwhile, Chinese stock markets continue to deflate after bubbling up beginning late last year. The evaporation of a massive amount of market capitalization generated during the China bubble cannot be a good thing. After all, a trillion here, a trillion there, pretty soon it adds up to real money.
Puerto Rico was in the news this week for all the wrong reasons. The commonwealth economy is struggling and has been for a long time due to the erosion of its manufacturing base. According to Governor Alejandro Garcia Padilla, the economy is not generating enough revenue to service its $70 billion debt. A $1.9 billion payment this week averted an immediate crisis, but does not resolve Puerto Rico’s problems. Puerto Rican debt was downgraded last February to two levels below investment grade by the major rating agencies. About $30 billion of the debt is owned by residents of Puerto Rico. Most U.S.-based municipal bond funds own Puerto Rican bonds due to their very favorable tax treatment.
We still expect the Federal Reserve to begin raising the fed funds rate in September. Their mandate rests squarely on the U.S. economy, which is showing improved performance at mid-year. However, financial market turmoil in Europe could give the Fed cause to pause. We don’t think that will happen. But the potential for financial market volatility in Europe will cause the Fed to keep their cards close to their vest over the next few weeks. Until a near-term path is established for Greece and the rest of the European Union, the Fed keeps its options open.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 07-03-15.