Last autumn I argued the consensus was too pessimistic about US economic prospects while neglecting the risk of serious weakness in Europe.
According to the latest vintage of data, US GDP rose by 2.2% in the year to the second quarter. This compares with increases of 1.5% in the Eurozone and 1.4% in the UK.
US pessimists have now rolled their forecasts of weakness into the second half of the year. GDP will slow sharply, they argue, as tax rebate stimulus reverses and slumping foreign growth hits exports. Real personal consumption in July was 0.4% below the second-quarter average.
I agree that the growth contribution of consumer spending and net exports will fall. However, the July real consumption number was depressed by a temporary spike in energy prices. Nominal spending actually grew by 0.2% on the month. Real consumption should revive in August and September.
Moreover, the stocks cycle and a diminishing drag from housing construction should compensate for smaller contributions from consumption and trade. The ratio of inventories to sales has fallen sharply, suggesting firms have been surprised by the resilience of final demand – see chart. Even a stabilisation of stock levels will give a sizeable lift to second-half GDP.
What could go wrong? A faster decline in employment could undermine my forecast of consumer resilience. August numbers released on Friday will be important but it would be surprising if firms stepped up job-shedding following solid second-quarter GDP expansion. Growth in withheld employment taxes – a coincident indicator of labour income – has strengthened in recent weeks, arguing against labour market deterioration.
