- The recently completed second quarter looks vulnerable to a weak GDP print. The drag from fiscal tightening will combine with mediocre business investment, a widening trade gap and weak inventory accumulation to bring overall economic growth back into the “weak-to-modest” range. We forecast a plodding 1.2 real GDP growth rate for the quarter, and have reduced our grade for the economic outlook one notch to C minus. However, U.S. economic conditions for the second half of the year are set to improve.
- The private sector of the U.S. economy is generating a virtuous economic cycle that will lead to stronger real GDP growth through the third and fourth quarters of 2013. Low, but improving, house prices and exceptionally low mortgage rates have bolstered both new and existing home sales. Existing home sales were up nearly 13 percent from a year ago in May. New home sales were up 29 percent in May from a year earlier. House prices were up 12 percent in April from a year earlier, according to the Case-Shiller 20-City Composite Index. With strong price gains and low mortgage rates, homeowners are building equity in their homes very quickly. The strong home equity gains have been complemented by improved stock prices in producing a positive wealth effect for U.S. households. This, in turn, has lifted consumer confidence and opened wallets for down-payments at auto dealers. Auto sales had a break-out month in June, climbing to a 15.9 million unit annual rate. Improved home buying, building and auto sales all add jobs which bolsters more home buying, building and auto sales and improved financials for related businesses, completing the virtuous cycle.
- Fiscal tightening is dragging on that virtuous cycle as federal spending continues to dial back. Fortunately, state and local government tax revenues are improving along with overall economic conditions which will support increased state and local government spending. This will offset some of the drag from the federal spending sequester. Monetary policy remains highly expansive, but the beginning of the end of highly expansive monetary policy is in sight. Better-than-expected job growth through Q2 and Q3 will allow the fed to begin the “calibration” process for QE3 this year. Expectations are concentrating around a September 19 announcement of a reduction in the Federal Reserve’s monthly asset purchase program. A reduction in easing does not mean tightening according to the Fed. Elsewhere, interpretations vary. The winding down of extraordinary monetary policy will be the key challenge for the next chairperson of the Federal Open Market Committee. President Obama may announce his nominee by the end of the summer.
For a PDF version of this Comerica U.S. Monthly with tables and charts, click here USEconomicUpdate0713.