US economy likely to remain on moderate growth path

The US economy’s performance in the first quarter was slightly weak. Indeed, the initial estimate of GDP growth was just 0.5 percent; however, the reading was upwardly revised to 0.8 percent. Moreover, the recent economic reports imply that the final figure, which will be released at the end of June might indicate the growth of around one percent in Q1 2016, said Daiwa Capital Markets in a research report.

Furthermore, gross domestic income, which is an alternative measure of total production, expanded 2.2 percent in the first quarter. This indicates stable growth rather than waning momentum.

The US economy is expected to continue on a moderate growth trajectory despite the hints of weak growth. Fundamentals in the main economic sectors continue to be favourable, whereas hostile factors have started to wane. In the last few years, consumer spending has been one of the most robust factors and is expected to be one of the strongest sectors in the coming quarters. The job market and the aggregate balance sheet of the consumer sector in the country are quite strong.

May’s weak employment report might raise concerns regarding the growth of spending. Job growth is not expected to meet last year’s average of 229,000 registered; however, a slowdown is likely as the economy comes closer to full employment. Even if job growth is expected to decelerate, layoffs are unlikely to be a problem in the present scenario. Hence, labor market tightening is expected to accelerate the pace of wage growth, thereby boosting demand, noted Daiwa Capital Market.

Consumers, via the housing market, are expected to contribute to the nation’s economic growth. Housing activity was weak last year; however, residential construction growth rebounded in the first quarter of 2016, while a sharp increase in new homes sales in April implies a favorable outlook. Pending home sales were also firm recently, indicating a strong market.

Meanwhile, exports and business investment are the two weak spots of the US. In the past two quarters, capital spending has fallen. Also, net exports have been a drag on the GDP growth. Both the sectors are expected to improve slightly, but remain weak. Pullback in drilling for natural gas mainly led the decline in business investment.

As energy-related products’ prices have increased from their lows, the drag should begin to diminish. The exports outlook will continue to be weak as relative performance outside of US economy is less favorable. The outlook for exports improved slightly as the lagged impacts of the USD appreciation in 2014-2015 will begin to diminish. However, sluggish growth outside of the US continues to be a problem. Therefore, additional constraints are expected from international trade.

Even if there are weak spots in the US economy, stronger factors are expected to dominate resulting in economic growth of around two percent, according to Daiwa Capital Markets. The pace is likely to be more rapid than the potential of the economy. This should result in further improvement of the US labor market and urge the US Fed to go ahead with normalizing the policy. Jobless rate is unlikely to fall from the recent levels.