US GDP: Economic Outlook Positive, Positive Data Surprises Possible in Coming Months
The US Dollar could benefit substantially in coming months if underlying currents in the US economy come to the fore.
Third quarter GDP numbers released out of the US on the 29th of October disappointed some in the market.
The figure read at 1.5% in Q3, below forecasts for 1.6% - not a massive miss, but enough to convince some that the US growth trajectory is pointed in the wrong direction.
To those sceptical of the outlook, consider that the weak headline number actually masks some encouraging ongoing strength.
"Most importantly, real consumer spending continued to power ahead. It was up another strong 3.2%, about the same as the previous four quarters," says Dr. Harm Bandholz, Chief US Economist with UniCredit in New York.
In addition, investment in equipment rose at the fastest pace in four quarters (+5.1%), while residential investment posted another solid increase (+6.1%).
Final sales to private domestic purchasers were up another solid 3.2% in 3Q15, the same as in 2014.
"Domestic demand, therefore, has maintained its strong momentum throughout the summer. In addition, real exports rose for the second straight quarter, and in five of the past six quarters, which should alleviate fears about the negative impact of the strong USD and a weaker global economy on the US," says Bandholz.
Amid all those encouraging developments, the sole reason for the weak headline GDP number was a huge inventory correction.
"As stressed before, it had become necessary, after inventories rose too rapidly throughout the first half of the year," argues the UniCredit analyst.
Following the sharp slowdown, the inventory build-up in 3Q15 has now been below the average seen over the past few years.
"The correction, therefore, should be over – and possibly even went a bit too far," says Bandholz.
Nathan Janzen with RBC Economics agrees:
"The drag from this volatile component is not likely to be repeated, with any potential reversal providing upward support going forward."
With solid underlying momentum and inventories ceasing to be a drag, GDP growth is poised to accelerate again in the current quarter towards 2.75%.
That will most likely be enough for the Fed to start raising rates in December suggest UniCredit.
RBC Economics also see a December interest rate rise:
"Our forecast assumes that the fed funds target range will be raised by 25 basis points in December, although such could still be delayed by renewed concerns about the effect of uncertainty about the external demand backdrop on domestic conditions going forward and/or a return of market volatility that delayed Fed action in September."
The December rate-rise story remains the single most important contributor to US dollar upside. Should this theme be maintained, as we believe it will, we would watch for further USD strength.
