US: Looking for a better second half – Nomura

Research Team at Nomura, suggests that the US growth stalled in H1 2016, but the data show better momentum in Q3 and expects a better performance in H2 to push growth to around 2%.

Key Quotes

"Activity: Q2 GDP grew at an annualized rate of 1.2%, suggesting little pickup in momentum in the US economy following a slowdown in previous quarters. But we remain cautiously optimistic that growth will ramp up in the second half of the year.

On the upside, consumer spending reaccelerated strongly in Q2 after losing momentum earlier in the year. We expect personal consumption to be the primary driver of growth in 2016, but expect it to grow at a more sustainable level of around 2.5-3.0% in 2016.

On the other hand, we still see limited scope for a strong rebound in business investment. Recent data on industrial activity suggest that a meaningful turnaround is still months away. Concerns over a global slowdown, uncertainty created by Brexit and the upcoming US elections could further dampen business spending. Furthermore, the industrial sector is still working through the negative impact of low oil prices on investment, although there are signs of some stabilization. All in all, we expect a modest rebound in the second half of 2016 after declines in the first half.

Residential investment slowed notably in Q2, but the slowdown is likely negative payback from demand being pulled up earlier in the year. We maintain our view that residential investment will continue to be construction on growth.

Inflation: We expect the drag from lower oil prices to mostly dissipate by the end of this year, and inflation should move higher by next year. We expect core CPI inflation to remain around 2%, while we expect core PCE inflation to trend gradually higher, partly owing to a gradual pickup in non-rent service prices, but to remain sub-2%.

Policy: Although we expect growth to reach 2% in the 2016H2, there is some uncertainty about the momentum in the economy after weak growth in Q2. We believe the FOMC will want more evidence that the economy is growing on trend. Therefore, we think the most likely timing for the next rate hike is December. In 2017, we expect only one rate hike—in June.

Risks: Geopolitical uncertainty, slower global growth, the strong dollar, low oil prices, and tight financial conditions remain the key risks to our outlook."