June sentiment indicators surprisingly good

US growth looks to have firmed up in the second quarter. The robust assessment of production and new orders in the surprisingly good survey-based indicators for June suggest that the economy is poised to make a buoyant start to the second half of the year. But with the external backdrop remaining awkward in the wake of the Brexit vote, this optimistic outlook is clouded somewhat. Nonetheless, the US economy is likely to clock up a moderate pace of expansion.

The indicators suggest that the US economy moved back up a gear in the second quarter after only subdued growth in the winter months. However, the pickup was not broadly-based, with private consumption probably providing the decisive impetus. Buoyed by strong real income gains in recent quarters,  households look set to have stepped up consumption spending at an annual rate of around 4%. Weaker motor vehicle sales in June compared with the previous month should not spoil the overall positive picture.

Even if consumption will probably not maintain the brisk pace seen of late, the substantial pickup in consumer confidence (Conference Board) at the end of the quarter suggests that growth will remain solid. Consumer assessment of the availability of jobs is consistent with an ongoing firm labor market, thus lending no support to the fears of a permanent slowdown in jobs growth that arose following May’s weak jobs report.

In terms of a return to broader-based growth going forward, the markedly im-proved results of the Institute for Supply Management’s (ISM) business surveys are encouraging. The index for non-manufacturing sectors improved largely thanks to an appreciably more favorable assessment of new orders, and at 56.5 points was well above the expansion threshold of 50. The purchasing managers’ index for the manufacturing industry moved up further in expansionary territory, climbing back to its early-2015 level. This increasingly indicates that the drag from factors such as the strength of the dollar until early this year, the drastic spending cuts in the energy sector and the throttling back of inventory investment is easing. The robust assessment of incoming orders, helped by a more upbeat assessment of foreign orders for the fourth consecutive month, signals a clear pickup in production in the near future.

As yet, the survey-based indicators barely reflect possible problems as a result of the Brexit vote. Initial pointers, however, are evident in a supplementary survey carried out by the ISM after the referendum. This showed that the majority of companies see negligible to slightly negative effects on their financial situation. Among companies expecting negative repercussions, the main concern was sharp currency swings. However, the effective exchange rate of the US dollar was relatively stable up to early July, leaving it still some way below the level seen in January.

With the external backdrop remaining tricky, economic momentum is unlikely to turn out as strong as the purchasing managers’ indices are suggesting. But we see the US economy achieving a moderate pace of expansion in the second half of the year and clocking up average growth of 2% in 2016 as a whole.


Thomas Hofmann
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