News from the US continues to outperform. There are few bright spots in the global economy at the moment but the US economy is certainly one of them. At the moment, the US is the only G10 economy that is able to stand up and say that it is enjoying strong growth, rising core inflation and a tightening labor market. It is for these reasons that the Federal Reserve is now the G10 central bank that is expected to raise rates the soonest in 2015.
Growth in Q3 rose by 3.9% on an annualized basis, higher than the 3.5% seen at the first reading a month previous. Once again it was corporate and household spending that was the catalyst for this expansion.
Corporate investment rose by 10.7% on an annualized rate on the quarter, revised from 7.2% at the first iteration. There is one fear that was evident within these numbers, however, with the trade gap tightening as exports slipped and imports moved higher. Of course, these are obvious functions of news from the Eurozone and China mixed with the vast outperformance of the US dollar since the summer.
Consumer spending is the main driver of all G10 economies and a 2.2% increase shows that the US consumer is back as an economic force. Disposable incomes of even the poorest American consumer have been helped by the calamitous fall in oil prices. Oil has hit a five year low this morning of $63.72/bbl. It’s fallen $44 in the last 119 days, down almost 41% since June 20th.
The upward pressure on incomes will continue if the tightness in labor markets finally starts to show increased wages. For most G10 nations, this is the final missing piece of the puzzle to both economic prosperity and certainty. This week’s jobs report – released Friday – is expected to show another piece of on-trend jobs growth; a tick lower in the unemployment rate to 5.7%, gains in the payroll numbers by around 220,000 positions and a 2.1% increase in hourly earnings from this time last year.
Everything is still pointing to a decent US GDP announcement for Q4, however, and we are penciling in growth of between 3-3.5%.
Inflation as measured by core PCE rose by 1.4% on the year. This was largely expected and shows that despite the moves in energy and food markets, the outlook for underlying prices is stable. We can expect this number to dip as the falls in oil prices pervade supply chains further but for now the outlook is good.
I have now moved World First’s expectation of when the Federal Reserve will raise rates from December of next year to June. Risks to this obviously stem from many issues. Global economic growth ex-US remains poor, the deflationary pressures from Europe and China could easily make the trip to the US and the tightening of financial conditions a strong dollar might cause may scare the Federal Reserve into holding off, but I remain confident in a summer move by the world’s most important central bank.