July 8, 2017

At Mid-Year, Is the US Economy a Zombie, or Just Sleepwalking?

Bruce Yandle

Distinguished Adjunct Fellow

No Roman candles were fired on the White House lawn when the Commerce Department raised its first quarter 2017 GDP growth estimate from a frigid 1.2 percent to a still-not-thawed 1.4 percent. In fact, there was nary a tweet. Remembering that the U.S. economy roared like a mouse in 2016 with 1.6 percent growth, the first quarter reading was just another confirmation of a seriously slow economy.

With 2017 at mid-point, it's time to review the situation. Do we have a zombie on our hands, a dead economy walking? Or just a sleepwalker that may wake up some day?

The sleepwalker is more plausible. But when will it wake up, shift into a higher gear, and start stepping with GDP growth at 2 or 3 percent, as Trump and everyone else hopes to see?

 

A quick check of bank lending doesn't give much cause for optimism. Commercial and industrial loans are being made at a positive level, but the year-over-year growth rate is falling. Put another way, bank lending is headed south; it is not booming. This is not a good sign for those looking for evidence of economic growth.

Maybe this is because of the large amount of cash sitting in corporate coffers, coupled with a sleepwalking economy. After all, businesses may not look to expand when the economy is hardly breathing. On the other hand, the low lending level may reflect the high level of policy uncertainty emanating from Washington. It's hard to read between the tweets, so to speak.

We get a similar cautious reading from civilian employment. Yes, more people are working every month. But the number being added, while positive on average, is getting smaller.

And we can see a not-so-happy picture when looking at vehicle shipments. If fact, it looks as though auto sales are peaking, albeit at a high level.

So where do we find signs for optimism? One place to look is durable goods orders, which had been plodding along, not rising or falling very much. They are now heating up. The pace is quickening. Score one for an improved second half of 2017.

Even better, industrial production has been accelerating since December 2015, and manufacturing employment, reversing its southward trip, has been rising since January 2017. Much because of a weak dollar, some of this industrial activity is seen in rising exports. The U.S. factory to the world is chugging along again.

Retail sales provide another bright spot. Now at a high level, the year-over-year growth rate is quickening. Perhaps this is being driven by positive consumer sentiment, as indicated by the University of Michigan's strong early 2017 readings.

But when the soothsayers put all this and other data in the cauldron, what final reading do they get? In the end, the forecasts are just a wee bit better.

Here's a quick summary. At its June meeting, the Federal Reserve Open Market Committee raised its 2017 forecast from 2.1 percent to 2.2 percent real GDP growth. The Philadelphia Fed's June 2017 Livingston Survey, a composite based on 38 forecasters, came in with a slightly reduced forecast for 2017's first half (from 2.2 to 2.1 percent), but a stronger 2.5 percent forecast for the second half. Finally, the June 30, 2017, reading for the Atlanta Federal Reserve Bank's GDPNow estimate for the second quarter is signaling 2.7 percent.

Not all forecasters are of one mind, however. The International Monetary Fund just reduced the U.S. forecast from 2.5 to 2.1 percent mainly because of poor expectations for the prospects of tax reform legislation this year.

All in all, at mid-year it appears the sleepwalking economy is stirring, but not much. There's a good chance we will see stronger growth for the rest of 2017 and for the year ahead. Of course, the prospects might even brighten without looming policy uncertainty as to whether Congress will pass tax reform and healthcare legislation. Economic uncertainty does not generally bring higher GDP growth.