The big question hanging over the US economy is just how strongly it can bounce back from a grim first quarter which saw the weather, a strong dollar and a ports strike all conspire to drag the economy down.
Those, most economists agree, were all temporary factors and the 0.7 per cent contraction therefore a blip. Get ready for a bounce back and a return to growth in the current quarter and through the rest of the year, most economists say. It may even be robust enough growth to justify the Federal Reserve delivering before the end of the year on its much-flagged “lift-off” and the first increase in its policy rate in nine years.
But even the policy makers at the centre of the debate concede the picture is murky.
“Today, I come before you as the proverbial two-armed economist,” Bill Dudley, president of the New York Fed told the Economic Club of Minnesota on Friday.
“On one hand, the economy’s forward momentum has slowed sharply during the first half of the year and inflation remains below the level the [rate-setting] Federal Open Market Committee (FOMC) views as consistent with price stability,” Mr Dudley said.
“On the other hand, I think it is also fair to say that we are still making progress towards our dual mandate objectives [full employment and price stability],” he went on, though he added that even recent solid job gains and a fall in the unemployment rate had occurred “only because productivity growth has slowed markedly”.
Mr Dudley’s view is seen as crucial by Fed watchers, many of whom are now doubling down on their bets for a September rate increase.
His view on Friday?
“I still think it is likely that conditions will be appropriate to begin monetary policy normalisation later this year,” the New York Fed president said on Friday. “But the likelihood and timing will depend on the economic outlook, and that will be largely shaped by the incoming economic data.”
Here are some reasons for optimism about the US economy and why many economists ended the week more certain about the possibility of a September hike:
- We’ve been here before. The first quarter last year was even grimmer than this year’s and the economy bounced back strongly over the rest of the year.
- The US labour market, after a bit of a hiccup in the spring, is continuing to look robust. The economy created a better than expected 280,000 jobs in May with the share of the population working hitting a post-recession high of 58.4 per cent. That has the Obama administration crowing about the longest streak of jobs growth on record. Over the past 63 months 12.6m jobs have been created in the US, Jason Furman, chairman of the president’s council of economic advisers, pointed out in a blog post on Friday.
- One of the big reasons for the first-quarter contraction in the US economy was a worse than expected trade position, with imports surging and exports failing to keep up as a result of a strong dollar. But data released this week showed the trade deficit narrowed more than expected in May and that led economists to argue that trade may actually end up making a positive contribution to GDP in the current quarter.
- Why the US consumer isn’t spending more has been perplexing economists. At the International Monetary Fund, economists have started talking about a structural shift in behaviour by Americans, who since the 2008 crisis have been saving more and spending less than they have historically. But economists expect next week’s retail sales data for May to show Americans coming out hibernation.
- One reason for hope is that Americans bought 17.7m new cars in May, the most in almost a decade. Tellingly, the data also shows a big surge in sales of gas-guzzling pickup trucks and sports utility vehicles.