US Fundamental overview and outlook

The FOMC continued to guide at its most recent meeting that it anticipates interest rate lift-off to occur in 2015, although the timing and extent of that lift off will depend on economic growth. The key domestic question seems to be whether or not economic momentum is adequate to sustain the current pace of labor gains.

• The US economy stalled in early 2015, with a steep pullback in oil & gas drilling and exploration activity in response to low global oil prices compounded by weather, transportation, and production disruptions.
• Activity is showing signs of rebounding through the spring as the impact of these transitory factors fades, though the latest reports continue to point to moderate growth momentum of around 2½% y/y during the second quarter. 
• Consumer confidence and spending remain well supported by strengthening job and income gains, cheaper gasoline prices, low borrowing costs, and rising stock market pricing and home values. 
• Continued strong job growth has pushed the unemployment rate to a seven-year low of 5½%, and alternative measures of labor market under-utilization continue to improve. 
• Auto sales in May reached their highest level in a decade, and major purchase plans are trending higher. 
• US housing activity also has gained traction in recent months, with both home sales and construction touching multi-year highs. A gradual easing in lending conditions alongside still good affordability, strengthening household formation and improving job markets should help sustain the recovery in the face of moderately higher borrowing costs. 
• The overall momentum in industrial activity, business spending, and capital goods orders remains soft amid the retrenchment in oil & gas drilling and sluggish export sales. 
• While US dollar strength and moderate global growth are weighing on export activity, solid domestic sales should maintain expanding manufacturing production. 
• At the same time, the US economy is getting a lift from a pickup in local and state government spending, and a reduced pace of federal fiscal restraint.
• Core inflation is holding steady at just under 2% y/y, with lower import costs and still restrained wage gains tempered by firmer services price trends. 
• Headline US inflation appears to have bottomed alongside firmer oil prices, and is expected to converge back toward core inflation by early 2016.