OUTLOOK IMPROVES GDP contracted at the fastest pace on record in Q2 following a plunge in domestic demand amid Covid-19 containment measures...

USA: Economic Outlook Improves

GDP contracted at the fastest pace on record in Q2 following a plunge in domestic demand amid Covid-19 containment measures. The external sector contributed positively to the reading, although this was due to a collapse in imports. Turning to Q3, activity is recovering as lockdown measures have eased since May, but the reopening has varied across states due to the uneven spread of new cases. In July, the unemployment rate dipped 0.9 percentage points, while retail sales edged higher, albeit at a softer pace than in May–June. Moreover, the fall in industrial production eased slightly in July and the IHS Markit manufacturing PMI hit its highest level since January 2019 in August. That said, consumer confidence dipped to a multi-year low in August due to the uncertainty surrounding the pandemic, while the lack of political agreement on further fiscal stimulus risks hurting the economy ahead. 

The economy will decline notably in 2020. The elevated unemployment rate will hamper consumer spending, while investment and exports are set to suffer. While announced fiscal and monetary stimulus should help to cushion the downturn, possible further lockdowns and the lack of additional fiscal measures pose significant downside risks to the outlook. FocusEconomics panelists see GDP contracting 5.2% in 2020, which is up 0.3 percentage points from last month’s forecast, before growing 4.0% in 2021. 

Inflation increased to 1.0% in July (June: 0.6%). It will likely remain well below 2019’s average for the rest of the year on depressed demand and relatively subdued energy prices. An economic recovery in H2 and vast monetary stimulus represent upside risks to the inflation outlook. FocusEconomics panelists see inflation averaging 0.9% in 2020, which is up 0.1 percentage points from last month’s estimate, and 1.7% in 2021. 

At its 28–29 July meeting, the Fed maintained the target range at its effective floor of 0.00%–0.25% and reaffirmed its commitment to using its full range of tools to spur the economy. At its annual Jackson Hole meeting on 27 August, the Fed announced a move to more flexible inflation and employment targeting. Panelists see rates unchanged this year and next. Our panelists project the federal funds rate to end 2020 at 0.25% and 2021 at 0.25%. 

The dollar index slipped over the past month as economic conditions improved globally, which raised investors’ risk appetite. On 28 August, the dollar index traded at 93.0, depreciating 1.6% month-on-month. The evolution of the Covid-19 pandemic at home and abroad should determine the greenback’s performance moving forward.

Second estimate confirms GDP contracted at historic rate in Q2 The economy declined at the sharpest rate on record in the second quarter as the pandemic and measures to contain it toppled activity. According to a second estimate GDP estimate released by the Bureau of Economic Analysis, the economy contracted 31.7% in Q2 in seasonally-adjusted annualized terms (SAAR), after shrinking 5.0% in the previous quarter. In annual terms, GDP plunged a titanic 9.1% in Q2, contrasting the first quarter’s 0.3% growth. The main headwind in Q2 came from private consumption, which plunged 34.1% SAAR (Q1: -6.9% SAAR). Moreover, the downturn in business investment intensified significantly (Q2: -26.0% SAAR; Q1: -6.7% SAAR) on a marked drop in equipment investment. That said, government consumption growth accelerated in the quarter (Q2: +2.8% SAAR; Q1: +1.3% SAAR). Turning to the external sector, exports of goods and services dived 63.2% in the second quarter (Q1: -9.5% SAAR), led by a freefall in exports of goods, while imports of goods and services shrank 54.0% (Q1: -15.0% SAAR). The external sector thus contributed 0.9 percentage points to the headline figure (Q1: +1.1 percentage points). Commenting on the second quarter’s performance, James Marple, a senior economist at TD Economics, noted: “We’ve had some time to digest the unprecedented decline in economic activity that took place earlier this year. Attention is now on the pace of the comeback. While there are signs of slowing in activity through the summer months as the virus spread, the switching on of the economy in May and June will still show up in double-digit annualized growth (likely in the neighborhood of 25% to 30% annualized) in the third quarter.” 

FocusEconomics Consensus Forecast panelists expect GDP to contract 5.2% in 2020, which is up 0.3 percentage points from last month’s estimate. For 2021, the panel expects the economy to expand 4.0%.

ISM manufacturing index continues to rise in July The Institute for Supply Management (ISM) manufacturing index increased from 52.6 in June to 54.2 in July, beating market expectations of 53.6 and marking the highest reading since March 2019. Consequently, the index moved further above the 50-threshold that separates expansion from contraction in the manufacturing sector. July’s result was driven by strong expansions in production and new orders, while employment improved slightly—but continued to point to a deterioration. Moreover, new export orders and backlogs of work rebounded in July relative to June. FocusEconomics Consensus Forecast panelists expect industrial production to decline 9.0% in 2020, which is up 0.3 percentage points from last month’s forecast. In 2021, panelists see industrial production rising 5.1%. Building materials and food services—also known as core retail sales—rose 1.5% in July, after growing 7.7% in the month prior. The rise in retail sales came as certain parts of the country carried on easing lockdown restrictions. Retail sales of electronics and appliances jumped 22.9% in July, while clothing and accessories, and gasoline purchases also jumped notably. Nevertheless, spending on building and equipment services and motor vehicles dipped in July. In annual terms, retail sales increased 2.7% in July, better than June’s 2.1% rise. Meanwhile, the annual average variation in retail sales growth was stable at June’s 0.3% in July. FocusEconomics Consensus Forecast panelists see private consumption falling 5.7% in 2020, which is down 0.1 percentage points from last month’s forecast. For 2021, the panel sees private consumption increasing 4.3%.

Labor market continues to improve in July Total non-farm payrolls surged 1.8 million in July, beating market analysts’ expectations of a 1.5 million climb. This follows June’s record-breaking 4.8 million payroll rise. Employment in the retail, leisure and hospitality, and healthcare and social assistance sectors increased notably, as containment measures continued to ease in most parts of the country. The unemployment rate decreased to 10.2% in July from 11.1% in June, while the labor force participation rate dipped marginally from 61.5% in June to 61.4% in July. Hourly earnings ticked up 0.2% month-on-month in July (June: -1.3% month-on-month), while annual wage growth decelerated slightly from 4.9% in June to 4.8% in July. Commenting on July’s reading, Sri Thanabalasingam, senior economist at TD Economics, noted: “It is encouraging that the labor market continued to improve in July, but high frequency indicators that do a good job in tracking monthly employment suggest that the recovery may have stalled or even reversed since the Bureau of Labor Statistics (BLS) administered July’s employment survey.” FocusEconomics panelists expect the unemployment rate to average 9.3% in 2020, which is down 0.3 percentage points from last month’s forecast, and 7.6% in 2021.

Home price growth slows in June The S&P/Case-Shiller 20-city composite home price index—excluding Detroit due to reporting delays—eased to 0.2% month-on-month in June, down from May’s 0.4% rise. When adjusted for seasonal factors, home prices were flat in June, after rising a modest 0.1% in May and missed market expectations of a 0.1% rise. Home prices grew 3.5% in annual terms in June, which was slightly softer than May’s 3.6% increase. Gains continued to be the strongest in Phoenix for the twelfth month running, followed by Seattle and Tampa. Overall, all 19 cities—Detroit data was unavailable in the index in June—registered price growth in June with five cities accelerating relative to May. Our panel expects home prices to increase 3.1% in 2020, which is up 0.1 percentage points from last month’s forecast. For 2021, panelists see home prices rising 1.3%.

Consumer confidence falls to the lowest level since May 2014 in August The Conference Board’s consumer confidence index decreased to 84.8 in August from 91.7 in July. Therefore, the index plunged further below the 100-threshold that separates pessimism from optimism. August’s result fell significantly short of market expectations of 93.0 reading and likely reflected increased concerns over the evolution of the pandemic domestically and as some states refrained from easing lockdown measures due to elevated numbers of new Covid-19 cases. American households’ assessment of the current state of the economy deteriorated sharply, while their assessment of short-term outlook for income and business conditions also worsened in August. Lynn Franco, senior director of economic indicators at the Conference Board, noted: “Consumer spending has rebounded in recent months but increasing concerns amongst consumers about the economic outlook and their financial well-being will likely cause spending to cool in the months ahead.” 

Inflation increases in July Consumer prices rose 0.59% over the previous month in July, slightly stronger than June’s 0.57% rise. Core consumer prices—which exclude volatile items such as energy and motor vehicle prices—drove the monthly increase. Inflation accelerated to 1.0% in July, from 0.6% in June. Meanwhile, core inflation increased to 1.6% in July from 1.2% in June. The core personal consumption expenditures price index—a gauge of household spending closely tracked by the Fed—ticked up to 0.8% in June, the latest month for which data is available, from 0.5% in May and moved closer to the Fed’s 2.0% target. FocusEconomics Consensus Forecast participants expect inflation to average 0.9% in 2020, which is up 0.1 percentage points from last month’s forecast. For 2021, the panel expects inflation to average 1.7%. 

Fed keeps rates at effective floor and sustains its commitment to expanding its balance sheet At its 28–29 July meeting, the Federal Open Market Committee (FOMC) decided to hold the target range for the federal funds rate at its effective floor of 0.00%–0.25%. Moreover, the Fed reaffirmed its commitment to using its full range of powers to support the economic recovery at its current pace. The Fed decided to keep the target range at its effective floor due to poor economic prospects amid the ongoing public health crisis, which are expected to keep employment and inflation levels depressed in the short term. Measures to contain the spread of the virus have battered employment, while low oil prices and weak demand have undermined inflationary pressures in recent months. To ensure sufficient liquidity for households and businesses and the effective transmission of monetary stimulus to broader financial conditions, the Fed will maintain its purchases of Treasury securities, and agency residential and commercial mortgage-back securities, at its current

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