Recent data on the US economy have been mixed. While the underlying fundamentals driving consumer spending remain positive—a strong job market, more-than-adequate income and wealth gains, and elevated levels of consumer confidence—recent readings on automotive sales, retail sales, and overall consumer spending suggest that American households are taking a breather. However, this spending hiatus is likely temporary and not the beginning of an extended period of softness. In fact, IHS Markit continues to predict that the annual pace of spending by consumers will pick up from 1.1% in the first quarter to 3% in the second and an average of 2.6% in the third and fourth quarters.
A similar mixed picture emerges when looking at housing data. On the one hand, robust home sales and rising home prices point to strength in the underlying demand for dwellings. On the other hand, the recent weakness in housing starts and permits (especially in multifamily units) suggests that homebuilders may be facing challenges, especially in getting the necessary financing to start new construction.
Data on the broader economy remain reassuringly solid. In the third estimate of first-quarter 2017 real GDP, annualized growth was revised up from 1.2% to 1.4%—more than double the initial estimate of 0.6%. Even more comforting, the latest reading on the growth in final sales to domestic purchasers (GDP less exports and inventories, which is less volatile than GDP) was 2.3%.
IHS Markit expects that the improved second-quarter performance of consumer spending will fuel real GDP growth to reach 2.7%. We predict that growth in calendar 2017 will average 2.3%, thanks to continued solid contributions from consumer spending, as well as both residential and nonresidential fixed investment.
There is considerably greater uncertainty regarding the growth outlook for 2018. The IHS Markit view is that modest fiscal stimulus (personal and corporate tax cuts, along with a boost in infrastructure spending) is still possible and will help GDP growth to accelerate to 2.7% next year. However, if such stimulus is not forthcoming, we estimate that real GDP growth will be approximately 0.4 percentage point lower in 2018, when the full impact of such stimulus would likely be felt. The good news is that the fundamentals of the US economy remain solid enough that, even without any stimulus, it can amble along at a decent pace for the next year or two.
-- By Nariman Behravesh, chief economist; Sara Johnson, senior research director; and Patrick Newport, director, Global Insight, IHS Markit