US: March quarter GDP expected weak but activity likely to rebound over the rest of the year - NAB

In view of Tony Kelly, Senior Economist at NAB, while March quarter US GDP is likely to be weak, activity is expected to rebound over the rest of the year.

Key Quotes

“Taking the middle ground between the signals coming from direct measures of economic activity and from survey/sentiment indicators suggest that the U.S. economy is growing at a moderate pace.”

“Partial data continue to point to soft GDP growth in the first quarter. We are expecting growth of only around 0.2% or 0.9% on an annualised basis.”

“There has been a tendency in recent years for March quarters to be weaker, on average, than growth in the rest of the year. This could be a coincidence, but another theory has been that of ‘residual seasonality’. Reported GDP data are seasonally adjusted by the statistician to remove regular, seasonal, swings in activity but the suggestion has been that this has been incomplete.”

“For 2017 we are expecting annual average growth of 2.1%, rising to 2.3% in 2018 on the assumption that fiscal stimulus kicks in.”

“In line with the median Fed member expectation, we had been expecting two further rate rises over the rest of 2017. We had pencilled these in for September and December, while noting that the next hike could easily be earlier.”

“However, we think it is unlikely that the Fed will both raise rates and announce QE unwinding at the same time. So while we still only expect two further rate increases we are pulling forward our expectations of when they occur to the June and September meetings.”

“The major risks to a June hike are the weakness in the ‘hard’ activity measures – the Fed would want to see improvement before increasing rates – and the current fiscal uncertainty. However, since the March rate hike, while the stock market has declined slightly, 10 year bond yields have also fallen, as has the US dollar, and corporate credit spreads have remained stable. All this adds up to fairly benign financial conditions, leaving the door open for a June hike, assuming the economy remains on track.”