Kristian Rouz – After a frustratingly low 1.2 percent annualized pace of expansion in 2Q16, the US economy is poised to maintain its current rate of growth in the second half of the year, despite the more optimistic projections of monetary authorities.
On Thursday, the Atlanta Fed released its preliminary estimate of US GDP expansion in 3Q16: an optimistic 3.7pc year-on-year. However, their preliminary expectation of 2.4pc growth in 2Q was double the actual growth of 1.2pc, with a build-up of inventories and a lack of effective sales having tamed the expansion. The US economy is experiencing its flattest GDP growth dynamics since the late 1940s, pointing to a current stagnation, underscored by the stickiness in wages, with a recession on the horizon.
The non-residential fixed investment drop was 2.2pc in Q2 from the previous quarter (-1.3pc year-on-year, a wider gap compared to —0.4pc in 1Q16). Meanwhile, low Treasury yields are providing a sense of relative stability in the financial markets, have contributed to a re-gearing of the corporate sector at best, instead of spurring capital spending.
"Our infrastructure is crumbling. Interest rates are historically low but set to rise, so it's a good time to do it," Robert Denk of the National Association of Home Builders said.
Subsequently, compared to its historic average growth of 3.3pc per year, the US economy had expanded by a modest2.2pc a year in 2012-2015, with the growth slowing to an annualized 1pc in the three quarters starting in 4Q15. Given that corporate earnings were battered severely starting in mid-2015, any increase in corporate spending, which would drive a broader economic expansion, is unlikely, resulting in 1-percent growth in Q3 and Q4 at best. When one factors in pre-election political uncertainty, the pace of expansion might slow further.
"Uncertainty is one of the reasons that businesses aren't investing," Bill Watkins of the Center for Economic Research and Forecasting at California Lutheran University said.
Meanwhile, the number of initial unemployment claims rose in the last week of July by 3,000 to 269,000, which is still below the acceptability threshold of 300,000. Personnel layoffs in the energy sector contributed to this slight increase. Manufacturing is also struggling, with orders for factory goods having dropped a second consecutive month in June, with the demand for transportation gear contributing the greatest.