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Investment Strategy

US Economy Still Stuck in First Gear

By Elliott H. Gue, on Aug. 31, 2016

Financial markets appear to have interpreted Chairwoman Janet Yellen and other prominent Federal Reserve officials’ comments at the annual economic policy symposium in Jackson Hole, Wyoming, as being hawkish for monetary policy.

On Aug. 15, the futures market had priced in an 18 percent probability that the Fed would boost interest rates by another 25 basis points following its Sept. 21 meeting. After the conference in Jackson Hole, the futures market assigned a 42 percent chance of a rate hike.

Nevertheless, the economic backdrop and upcoming presidential election suggest that the risk of the Fed bumping up interest rates this fall remains minimal.

So Much Depends on the US Consumer

Any resurgence in US economic growth likely hinges on consumer spending, which accounts for more than two-thirds of GDP and has remained a relative bright spot throughout the year.

In the second quarter, personal consumption expenditures contributed 294 basis points to US GDP growth, though this area of strength was offset by pronounced weakness in business investment, a drawdown in inventories and a slight drag from government spending.

The monthly data on personal income and expenditures released this week suggest that consumer spending benefited from gains in wages and income this summer and has held up reasonably well.

(Click graph to enlarge.)Personal Income and Expenditures

Analysts who call for a major recovery in GDP growth later this year argue that consumer spending will continue to power the economy while headwinds from weak business investment and inventory drawdowns fade over the next two quarters.

A recovering job market and two consecutive months of stronger-than-expected payroll gains underpin the bullish outlook for consumer spending.

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