15 Feb 2016
US: A two-tiered economy - Nomura
Research Team at Nomura, suggests that in the US, the manufacturing sector faces strong headwinds and will weigh on growth, but the rest of the economy remains resilient.
Key Quotes
“Activity: Personal consumption and residential fixed investment came in stronger than our expectations in Q4, which suggests better momentum heading into 2016. But manufacturing activity has been severely hampered by declining oil prices and the strong dollar. Investment in oil and gas drilling activity declined further in Q4, and we expect further declines to start the year. But given the already low level of investment in this sector, the negative contribution to growth should be more modest than in the past.
Other parts of the industrial sector seem to be struggling as well. Durable goods orders for core capital goods, a good proxy for capital goods demand, dropped sharply in January and the recent decline in capacity utilization of the industrial sector coupled with slowing exports should constrain business equipment investment. Incoming data on inventory suggest further drawdown in Q4, somewhat weaker than the BEA’s assumption in the first estimate, implying less need for inventory adjustment in Q1.
Taking all of these factors into account, we expect top-line growth to clock in at 1.3% in Q1 2016 before reaccelerating closer to 2% in Q2. Thereafter, in the second half of 2016, better consumer spending and some rebuilding of inventories should push growth above 2%. In 2017, we expect growth to gradually slow closer to potential growth.
Job growth bounced back strongly in Q4 after slowing somewhat in Q3. But further out in the outlook, we expect job gains to ratchet down, as growth stabilizes around potential.
Inflation: We expect the drag from lower oil prices to mostly dissipate by the end of this year, and inflation should return closer to 2% by next year. As the output gap narrows, we expect core CPI inflation to remain elevated around 2%, while core PCE inflation is expected to trend higher due to higher healthcare prices.
Policy: At the 15-16 December FOMC meeting, the Committee voted to raise the federal funds target range by 25bp to 0.25-0.50%. Given our expectations for the economy and inflation in 2016, as well as the uncertainty surrounding the evolution of financial conditions, we believe that the second rate hike is likely to come at the June meeting.
Risks: Geopolitical uncertainty, slower global growth, the appreciating dollar, declining oil prices, and tighter financial conditions remain the key risks to our outlook.”
Key Quotes
“Activity: Personal consumption and residential fixed investment came in stronger than our expectations in Q4, which suggests better momentum heading into 2016. But manufacturing activity has been severely hampered by declining oil prices and the strong dollar. Investment in oil and gas drilling activity declined further in Q4, and we expect further declines to start the year. But given the already low level of investment in this sector, the negative contribution to growth should be more modest than in the past.
Other parts of the industrial sector seem to be struggling as well. Durable goods orders for core capital goods, a good proxy for capital goods demand, dropped sharply in January and the recent decline in capacity utilization of the industrial sector coupled with slowing exports should constrain business equipment investment. Incoming data on inventory suggest further drawdown in Q4, somewhat weaker than the BEA’s assumption in the first estimate, implying less need for inventory adjustment in Q1.
Taking all of these factors into account, we expect top-line growth to clock in at 1.3% in Q1 2016 before reaccelerating closer to 2% in Q2. Thereafter, in the second half of 2016, better consumer spending and some rebuilding of inventories should push growth above 2%. In 2017, we expect growth to gradually slow closer to potential growth.
Job growth bounced back strongly in Q4 after slowing somewhat in Q3. But further out in the outlook, we expect job gains to ratchet down, as growth stabilizes around potential.
Inflation: We expect the drag from lower oil prices to mostly dissipate by the end of this year, and inflation should return closer to 2% by next year. As the output gap narrows, we expect core CPI inflation to remain elevated around 2%, while core PCE inflation is expected to trend higher due to higher healthcare prices.
Policy: At the 15-16 December FOMC meeting, the Committee voted to raise the federal funds target range by 25bp to 0.25-0.50%. Given our expectations for the economy and inflation in 2016, as well as the uncertainty surrounding the evolution of financial conditions, we believe that the second rate hike is likely to come at the June meeting.
Risks: Geopolitical uncertainty, slower global growth, the appreciating dollar, declining oil prices, and tighter financial conditions remain the key risks to our outlook.”