1 August 2017

The US Economy Bounces Back

After the poor start to 2017, there were fears that the United States economy was running out of steam and could experience a sharper slowdown than anyone expected.  However, a stronger performance by the US economy in the second quarter of this year raised hopes for the world’s largest economy, while calling into the question the reasons why the US economy has typically struggled to record strong GDP growth in the first quarter of recent years.  Sure, there is a great deal of uncertainty surrounding the US economy at the moment, much of which is due to the mixed signals coming from Washington in recent months.  However, consumer, business and investor confidence levels remain relatively high when one considers the current political climate in the US.  Moreover, the United States enjoys a number of major advantages that allow its economy to expand, even in more difficult periods.  In fact, the US economy is currently in the midst of an eight-year recovery that has produced higher rates of growth than just about any other developed economy over the period.  However, these growth rates during the recovery have been weak when compared with previous recoveries, and the benefits of this growth have been distributed quite unevenly, something that has contributed to today’s political climate in the US.

The United States economy expanded by 2.6% on an annualized basis (2.1% on a year-on-year basis) in the first quarter of this year.  While this rate of growth was in line with our expectations, it was nonetheless a relief for many US officials given the turbulent political and economic climate in recent months.  The key driver of this growth was consumer spending, which rebounded to grow by 2.8% in the second quarter.  Business spending also continued to rise in the second quarter of this year, although fixed investment growth slowed during this period.  Exports also provided a spark as they expanded by 4.1% in the second quarter of this year, boosted by the weakening of the US dollar against most other major currencies.  In contrast, a number of factors prevented the US economy from recording even stronger growth in the second quarter.  For example, business inventory building was weak for a second consecutive quarter.  In addition, the housing sector suffered what is expected to be a temporary downturn last quarter, with labor shortages holding down growth in that sector. 

The outlook for the remainder of this year calls for growth levels to hover between 2.5% and 3.0% over the last two quarters of 2017.  Of course, should the political turmoil in Washington worsen, there could be a knock-on effect on business and investor confidence that would hinder growth in the coming months.  However, a number of factors are expected to combine to drive growth forward in the United States over the remainder of this year.  For example, low unemployment, rising wages and a soaring stock market should boost consumer spending, the key driver of growth for the US economy.  Likewise, business spending levels are expected to increase in the coming months.  Finally, the external climate is better than it has been at any time over the past six years, with demand levels in key export markets rising and with the recent weakening of the US dollar significantly boosting the US’ level of economic competitiveness.  As a result, the US economy is now expected to grow by 2.2% this year, almost the same level as the average economic growth rate in the United States over the past three years.