U.S. economic data through the end of summer was consistent with an ongoing moderate GDP expansion. That said, we do expect to see some giveback from the strong 3.7 percent real GDP growth that is now reported for the second quarter. In the current third quarter we expect real GDP growth to decrease to about 1.5 percent, before re-accelerating in the fourth quarter of this year. Through the quarterly fits and starts of the GDP numbers, we see the consumer sector consistently pushing the economy ahead. This view gives us some confidence that recent volatility in global financial markets will not evolve into serious headwinds for the U.S. economy.
Consumer spending accounts for two-thirds of U.S. gross domestic product. So a strong consumer sector can act as a flywheel, maintaining momentum in the U.S. economy even as it is buffeted from international events.
China is a source of uncertainty and volatility. Two recent manufacturing indexes confirm a slow-down in the Chinese economy over the summer. Also, the highly speculative Chinese stock market has sold-off. The Chinese response to the two developments appears to be scattered. While the U.S. is a key trading partner of China on an absolute scale, relative to the size of U.S. GDP, our trade with China is small enough to say that reduced demand for U.S. exports will hurt individual companies, but it will not be enough to significantly weaken the overall U.S. economy. Other countries will feel a larger drag from weaker Chinese demand, including Japan, Australia, South Korea and Malaysia.
Evidence of a solid U.S. economy is seen in August auto sales. Auto sales zoomed up to a robust 17.8 million unit sales rate in August, the best monthly sales rate since the blowout 20.6 million unit rate of July 2005. Lower gasoline prices and a firming residential construction industry boosted truck sales in August.
Halcyon days for the auto industry are supporting overall manufacturing indicators, even as headwinds increase from a stronger dollar and weaker oil field activity. The ISM Manufacturing Index for August eased to a still positive 51.1 percent, indicating overall improving conditions for the month.
The ISM Non-Manufacturing Index, which more closely aligns with overall U.S. economic performance than the ISM Manufacturing Index, is showing strength. In August, the ISM Non-MF Index ticked down to a still strong 59.0 percent. A 59 is a good reading for this index, which rarely surpasses 60. Production, new orders and employment sub-indexes were all solidly positive in August. Anecdotal comments were, too.
Overall construction spending increased by 0.7 percent in July, boosted by both private residential and private nonresidential spending.
The count of payroll jobs increased by 173,000 in August, below expectations. However, several other components of the report showed improvement, including the unemployment rate. Even with weaker-than-expected payroll jobs gains, the unemployment rate fell by more than expected, to 5.1 percent for the month. We are on track for a sub-5 percent unemployment rate by early 2016.
The financial news media will do its best to fill the vacuum created by a still undecided Federal Reserve over the next two weeks, until the FOMC makes their policy announcement on September 17. Nothing about the Fed’s view on interest rates can be said with certainty. What can be said, is that an uncertain Fed is adding to global uncertainty and therefore to financial market volatility. The combination of a shaky China, an uncertain Fed and gyrating oil markets is not good. We believe that the Fed will act to diminish global uncertainty by announcing a small increase in the fed funds rate on September 17, but that is just a guess at this point. They could easily delay the increase until October or December, or even wait until 2016. But if they pass on their window of opportunity now, the window could be even smaller later.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 09-04-15.