- After three disappointing quarters, growth is expected to rebound in Q3. Thereafter, uncertainty clouds the horizon, although the vigorous labour market should continue to set the tone.
- After a welcome acceleration, inflation has slowed once again, mirroring wage growth. Several brakes on inflation are dissipating, notably the dollar’s appreciation and declining oil prices, albeit without upward pressures being generated.
- FOMC members more or less agree on the analysis and the need for prudence. Yet they are still divided over what prudence means and what form it should take: should the Fed gradually raise key rates or maintain the status quo?
Next week’s meeting of the Federal Open Market Committee (FOMC), the Fed’s monetary policy arm, will coincide with the release of its updated economic projections and a press conference by Fed Chair Janet Yellen. These “content-rich” meetings (four a year, at the end of each quarter) are generally seen as windows for monetary policy changes as they provide more opportunities to clarify any decisions than the other FOMC meetings, which are only followed by relatively succinct press releases. With the approach of the FOMC meeting of September 20 and 21 and this window of opportunity for policy change, it is worth reviewing the US economic situation.
Activity: how big of a rebound?
The Q2 national accounts were unexpectedly revised downwards. The preliminary estimate had shown Q2 GDP growth of 1.2% (quarterly annualised rate). This figure was expected to be revised upwards, since the change in inventory was once again one of the weak points of growth, as it has been for the previous four quarters. Instead, growth was revised downwards to 1.1%, and the negative contribution of inventory changes was even larger than expected at 1.3 points (vs. a preliminary estimate of 1.2 points). In a nutshell, corporate spending has been the main source of weak demand in recent quarters, with fixed investment contracting another 0.9% in Q2. Moreover, this decline now extends beyond the energy sector alone. Yet several positive points are also worth mentioning. Household spending remains very buoyant, with consumption up 4.4%.
Moreover, although corporate profits continue to decline, a turning point could be in sight. This, in any case, is what the rebound in cash flows seems to be signalling: at a time when monetary and financial conditions are very accommodating, this rebound could fuel a recovery in investment. Indeed, investment contracted less in Q2 than in the two previous quarters (-0.9% compared to an average of -3.4%).
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by Alexandra ESTIOT