US: Slightly more growth near-term but less in the out years due to lower potential growth – Nomura

Research Team at Nomura, suggests that in light of incoming data and their new assessment of long-run potential growth, in the near term they see a bit more room for US growth from stronger consumer demand.

Key Quotes

“Consumer spending reaccelerated in Q2 and labor market fundamentals remain positive for solid consumer activity. On the other hand, we see some additional drag from inventory investment as the inventory-to-sales ratio remains elevated.

With the output gap essentially closed, we expect the economy to slow to the rate of growth of potential output, which we estimate to be around 1.5% by end-2018. Our estimate of potential growth reflects our view that total factor productivity will grow at roughly the same pace that is has over the past decade and that structural factors (i.e., primarily aging workforce) will hold down labor force participation. We think that the prospect of lower potential growth over the medium term will tend to depress aggregate demand by reducing investment.

We see little prospect for fiscal expansion as we expect political gridlock to continue after the national elections in November. Given recent polling data, we expect Clinton to be the next president, but we also expect the Republicans to retain control of the House of Representatives. This is likely to mean only marginal changes to federal fiscal policy over the next two years.

With a falling labor force participation rate and weaker prospects for growth, we forecast a lower path for job growth and average weekly hours. However, the decline in the labor force participation rate will push the unemployment rate below the natural unemployment rate (~4.7–4.8%), which should add to inflationary pressures in the economy.

Our outlook on inflation and monetary policy remains unchanged. We expect the drag from lower oil prices to mostly dissipate by the end of this year, and core inflation to gradually pick up over the outlook. We expect the FOMC to raise rates this year in December and we believe there is room for one hike in 2017, most likely in June.”