US economy showing signs of improving momentum after a weak start to the year

The US economy is showing signs of improving momentum after a weak start to the year, led by consumer and housing activity. Solid job growth, rising income gains, low gas prices, and pent-up demand should sustain the pickup in household demand into next year, while stronger sales are expected to give a lift to business investment. Consumer confidence and spending remain well supported by strengthening job and income gains, cheaper gasoline prices, low borrowing costs, and rising home values. Continued strong job growth has pushed the unemployment rate to a seven-year low of 5.3%, and alternative measures of labour market underutilization continue to improve. 

Auto sales are running at their highest level since early 2000, and major purchase plans are trending higher. US housing activity also is gaining traction, with both home sales and construction touching multi-year highs. A gradual easing in lending conditions alongside still good affordability, low mortgage rates, strengthening household formation and improving job markets should help sustain the recovery. 

The overall momentum in industrial activity and business spending remains soft amid the retrenchment in oil & gas drilling and sluggish export sales. However, a strong rebound in durable goods orders in June and July and a modest tightening in capacity utilization point to some firming in capital investment intentions in the months ahead. While US dollar strength and moderate global growth are weighing on export activity, solid domestic sales should maintain expanding manufacturing production, led by motor vehicles and technology goods. 

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, and is expected to drift back toward core inflation in 2016.