U.S. Economic Outlook Still Unsettled

Randy ShumwayShort-Term U.S. Outlook

U.S. economic data continues to straddle the line between strong recovery and relapse into downturn.

First-quarter GDP growth was revised upward from 0.5 percent to 0.8 percent, which is a step in the right direction, but this figure was still lower than the expected increase of 0.9 percent. This represents the slowest annual growth rate since the first quarter of 2015. The upward revision reflected an increase in after-tax corporate profits of 0.6 percent, which was a welcome change from the fourth quarter’s decline of 8.4 percent. Income also increased in the first quarter, expanding at a 2.2-percent rate compared to the previous quarter’s 1.9-percent rate. On a high level, first-quarter GDP growth has been sluggish for five of the last six years, so poor performance in the first-quarter, although unwelcome, is not unexpected.

The labor market offered the biggest shock in terms of economic data. While the unemployment rate declined from 5.0 percent to 4.7 percent, the jobs report released at the beginning of June revealed that a mere 38,000 jobs had been added to the economy in May—significantly below Wall Street’s projected growth of 162,000 jobs. Last year, the economy added 2.7 million jobs, which averaged out to 230,000 per month. Economists are currently trying to understand if May’s gain of 38,000 represents a temporary lull in job creation—an indication that we are nearing full employment—or a signal of a developing trend.

Consumer spending was not revised in the GDP growth estimate. Consumer spending has been a large driver of U.S. economic growth over the past several years. Amid falling global demand, the American populace provided much of the momentum needed to stay on track for economic recovery. Consumer spending accounts for more than two-thirds of U.S. economic activity, which means Americans and their purchasing behaviors will continue to play a major part in the U.S. economic outlook over the short and long term.

On a positive note, home values and personal disposable income have risen over the past year. Lower oil prices have resulted in an average household purchasing power increase of $1,300 since mid-2014. Strong consumer spending is likely to continue barring any unforeseen adverse economic circumstances.

Long-Term U.S. Outlook

Some interesting developments in the U.K, China, and Trans-Pacific Partnership could have a major impact on the long-term economic outlook of the United States.

First, the U.K. referendum regarding whether or not it should remain in the European Union will have a significant effect on the long-term U.S. economy. The European Union in general is a major trading partner for the U.S., and any hit to its stability will certainly jostle the United States and leave a range of questions about the long-term reliability of the partnership from an economic perspective.

Second, China has been working hard to prop up the yuan, but the long-term stability of the yuan is questionable. As the dollar’s value is rising—and will rise even further when the Fed raises rates—other currencies, including the yuan, will drop in comparison. While China’s exporters may welcome a declining yuan, the bigger worry is that capital outflow may result. China has many capital controls in place, but it cannot guarantee that investors will not move their money overseas.

Third, uncertainty in the upcoming U.S. presidential election has put some economic agreements in a holding pattern, particularly the Trans-Pacific Partnership (TPP). A recent economic study indicated that the TPP would provide a boost for American agriculture and services, although the U.S. would face greater competition in manufacturing. However, the future of the TPP is uncertain at this point as presidential contenders have rejected the TPP and slammed past trade agreements.