U.S. economic data from late summer has been largely positive. However, global financial markets have exhibited a high degree of volatility and this creates the potential for an adverse feedback loop back to the U.S. economy. The global stock market sell-off that was triggered in China, and rolled through Europe before cascading over U.S. markets appears to have run its course. But this cannot be said definitively.
About China, nothing can be said definitively. The Chinese economy appears to be slowing down, well below the official 7 percent year-over-year real GDP growth rate reported for 2015Q2. Current estimates of real GDP growth for China range from 5 to 3.5 percent , with outlier estimates down to zero. Countries tightly linked to China through international trade, such as Australia, Brazil and most east-Asian economies, are already feeling the drag from a weaker China. Japan, the most leveraged of all major economies, is tightly linked to China. Slow growth and high leverage is an unattractive combination for both China and Japan.
The U.S. is not as tightly coupled to China, but it would be an overstatement to say that the U.S. economy is entirely decoupled from China. China is simply too big and globally connected to ignore.
What we can say about the U.S. economy is that momentum appears to be growing in the consumer sector, which accounts for two-thirds of U.S. GDP. Low gasoline prices, strong job growth and firming house prices have put the wind at the back of U.S. consumers.
However, uncertainty emanating from the recent global equity market correction may take some wind out of sails, and the sales, of U.S. consumers. If the correction has run its course, and if businesses continue to hire at at least a moderate pace, then consumer spending will continue as a powerful stabilizing force for the U.S. economy. We believe that that is the most likely outcome.
U.S. real GDP growth for 2015Q2 was revised up to 3.7 percent, confirming a consumer led rebound after the meager 0.6 percent GDP gain for the first quarter. The gain in consumer spending in Q2 accounted for over half the total GDP growth.
Real disposable personal income increased by 0.4 percent in July, the strongest gain since January. Real consumer spending increased by 0.2 percent, pushing the personal saving rate up to 4.9 percent.
Initial claims for unemployment insurance fell by 6,000 for the week ending August 22, to hit 271,000. This very low level of new claims is entirely consistent with ongoing payroll job gains in August. Continuing claims for unemployment insurance gained 13,000 to finish the week of August 15 at a very favorable 2,269,000.
New orders for durable goods increased by 2.0 percent in July, aided by a strong auto industry.
New home sales increased by 5.4 percent, to a 507,000 unit annual rate, after falling in June. The U.S. national Case-Shiller house price index gained 0.1 percent in June, and was up 4.5 percent for the year.
Financial markets are firmly focused on the Federal Reserve, anticipating what policy makers will do at the upcoming September 16/17 FOMC meeting. We believe that the most likely timing for the first fed funds rate increase is still September, but that is not written with overwhelming conviction. We would place the odds of a September rate increase at 30 percent. Late October gets 25 percent and mid-December gets 20 percent, leaving 25 percent for all of 2016. The flattish probability distribution reflects the potential for more financial market stress in the near term.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 08-28-15.