US: Looking for a better second half - Nomura

Research Team at Nomura, notes that the US growth stalled in H1 2016, but the data show better momentum in Q3 and they expect a better performance in H2 to push growth to around 2%.

Key Quotes

“Activity: Q2 GDP grew at an annualized rate of 1.1%, suggesting little pickup in momentum in the US economy following a slowdown in previous quarters. But we remain cautiously optimistic that growth will ramp up in the second half of the year.

In the near term we see a bit more room for growth from stronger consumer demand. Consumer spending reaccelerated in Q2 and labor market fundamentals remain positive for solid consumer activity. On the other hand, we see some additional drag from inventory investment as the inventory-to-sales ratio remains elevated.

With the output gap essentially closed, we expect the economy to slow to the rate of growth of potential output, which we estimate to be around 1.5% by end-2018. Our estimate of potential growth reflects our view that total factor productivity will grow at roughly the same pace that is has over the past decade and that structural factors (i.e., primarily aging workforce) will hold down labor force participation. We think that the prospect of lower potential growth over the medium term will tend to depress aggregate demand by reducing investment.

With a falling labor force participation rate and weaker prospects for growth, we forecast a lower path for job growth and average weekly hours. However, the decline in the labor force participation rate will push the unemployment rate below the natural rate.

Inflation: We expect the drag from lower oil prices to mostly dissipate by the end of this year, and inflation should move higher by next year. We expect core CPI inflation to remain around 2%, while we expect core PCE inflation to trend gradually higher, partly owing to a gradual pickup in non-rent service prices, but to remain sub-2%.

Policy: Although we expect growth to reach 2% in the 2016H2, there is some uncertainty about the momentum in the economy after weak growth in Q2. We believe the FOMC will want more evidence that the economy is growing on trend. Therefore, we think the most likely timing for the next rate hike is December. In 2017, we expect only one rate hike—in June.

Risks: Geopolitical uncertainty, slower global growth, the strong dollar, low oil prices, and tight financial conditions remain the key risks to our outlook.”