US domestic demand fundamentals remain strong

The disinflationary forces will deliver some offsetting benefits to the U.S. economy. Whereas in June, the average household was set to save $700 at the gas pumps relative to last year, they will now save over $900. As there is a lag between when the savings occur and when they show up in spending, the largest upside to spending will take place over the course of 2016. This boost to spending is set to occur alongside further improvements in job creation and wage growth. Putting it all together, real consumer spending growth is expected to accelerate to 3.3% in 2016, up from 3.1% in 2015. 

Consumer spending will not be the only part of the domestic economy to add to growth. The housing market has also shown signs of heating up, with existing home sales continuing to break through new post-recession highs. Perhaps even more encouraging, household formation is trending strongly upward. According to the Census Bureau, there were over 1.5 million households created between the second quarter of this year and the same quarter a year ago - the strongest growth since 2006. So far, all of these households have been renters. The homeownership rate continued to decline in the quarter. Still, the rise in the propensity of people to form independent households is a firm step in the right direction. Construction continues to run behind the rate of household formation, especially within the rental segment, where the vacancy rate has fallen to a 30 year low. This gap should begin to close through the forecast. 

"We expect housing starts to steadily rise through the forecast period, reaching 1.5 million by the end of 2017 - roughly in line with underlying household formation and depreciation", notes TD Economics.

Finally, with the continued improvement in the labor market and housing market, the outlook for state and local governments is also looking better. There has already been evidence of this over the last several months. State and local governments have added an average of 26k jobs to U.S. payrolls over the last three months ending in August - the fastest pace in seven years. While austerity is unlikely to turn into largesse and overall government spending will continue to underperform the rest of the economy, it is still expected to contribute modestly to annual economic growth - adding an average of 0.2 percentage points over the forecast horizon. Relative to the net drag of 0.3 percentage points that it has averaged since the recession ended in 2009, this is a welcomed change.