US Economy Expected to Rebound in Q3

Oct 27, 9:46 am
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A sluggish start to economic growth this year in the midst of an interest rate tightening cycle gets interesting as Friday’s third quarter preliminary GDP report is expected to shed light on the economic performance in the US.

The broad consensus being that the US economy managed to gather pace in the third quarter, with the median estimates pointing to a 2.5% growth. This follows a 1.4% increase seen in the second quarter and about 1.1% for the first half of the year.

A rebound in the third quarter would no doubt cement the prospects for another rate hike in December. US consumer confidence soared to a 9-month high in September alongside a steady jobs market which is underpinning hopes that the US economy will see a +2% GDP growth during the quarter. According to latest reports released earlier this week, consumer confidence was seen moderating as the index fell to 98.6 in October from 103.5 in September. The data was however seen as pre-election jitters as the broader outlook points to a moderate pace of improvement.

Despite a slowdown in US consumer spending during the quarter, GDP growth is expected to increase, largely thanks to stronger auto sales as well as trade and inventory which are expected to boost growth during the reported period. Experts believe that policymakers will, therefore, be looking to the final demand which is expected to be good enough to underpin hopes for a rate hike in December. Retail sales including online retailers and restaurants rose 0.6% in September and stood at 2.7% on a year over year basis according to official reports earlier this month.

NY & Atlanta Fed give subdued economic forecasts

As of last Friday, the New York Federal Reserve Bank which publishes its own forecasts or GDP tracker, NowCast model projected a GDP growth in the third quarter to 2.22%, slightly down from 2.30% just a week before. The NowCast model also forecasts a fourth-quarter growth could slow to 1.40% as of Friday, October 21st. The NowCast model gave a downbeat view on GDP growth on account of weaker than expected housing data and the regional manufacturing surveys for the third quarter.

NY Fed NowCast: Forecast of 2.2% for Q3 2016
NY Fed NowCast: Forecast of 2.2% for Q3 2016

On the other hand, Atlanta Fed’s GDPNow forecast model has projected that the US economy grew at a pace of 2.0% which is a modest revision from 1.9% from the week before.

Other mainstream GDP trackers such as CNBC’s Rapid update projects a median estimate of Q3 growth at 2.6%, which puts the broader median estimate around 2.5%.

Slower GDP growth: The new normal?

In a research article published by John Fernald, a Sr. research advisor from the San Francisco Fed estimates that the new normal for US economic growth was probably between 1.5% and 1.75%. Fernald said that the slowdown in the pace of growth since the post-war era comes on account of retiring baby boomers and shrinking employment growth.

Earlier this month, the International Monetary Fund (IMF) issued a warning that growth in the US could slow, exacerbated by the upcoming election uncertainty. The IMF forecasted an annualized growth rate of 1.60% for the United States this year noting both political and economic risks alongside tailwind risks on account of Brexit. “The US had lost momentum over past few quarters,” the IMF said in its statement.

The annual GDP growth rate in the US has been steadily declining ever since growth peaked at 3.3% in Q1 2015 and had since then posted a steady decline. As of the second quarter, the annualized GDP growth rate was registered at 1.3%, the lowest since Q3 2013.

US Annual GDP Growth Rate: 1.3%, Q2 2016
US Annual GDP Growth Rate: 1.3%, Q2 2016

US GDP Release Date, Time and Details

DateTimeCurrencyReportForecastPrevious
28-Oct3:30 PM*USDGDP Annualized q/q2.50%1.40%
Employment cost index s.a (q/q)0.60%0.60%
GDP Price Index q/q1.40%2.30%
PCE Core q/q1.60%1.80%

*Time: GMT+3

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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