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Medium-Term Outlook Remains Healthy for U.S. Economy

September 19, 2013 · Update in PDF PDF

Short-term indicators sent conflicting signals in July and August. Forecasts for growth are lower than desired, and housing, labor and business market data are disappointing. But there are encouraging data as well, and brighter medium-term evidence suggests that the weakness is likely a deviation from an upward trend.

In addition, several forward-looking metrics, including leading economic indicators and consumer expectations, have edged higher. Backward-looking gross domestic product (GDP) revisions also offer better news.

Forecasts Below Trend Despite Upward Revisions

Prospects for 2013 growth are mixed as forecasts remain tempered, yet backward-looking estimates for the first half improved. Third-quarter Survey of Professional Forecasters and Blue Chip forecasts of real 2013 GDP growth stand at 1.5 and 1.6 percent, respectively. The second reading of second-quarter GDP growth from the Bureau of Economic Analysis (BEA) was revised to 2.5 percent in August from the 1.7 percent advanced reading in July. This rise reflects an upward revision in the trade-balance contribution from -0.8 percentage points in July to a break-even level (Chart 1). Personal consumption still accounts for the bulk of GDP growth, but fixed residential investment continues to normalize and is poised to play a larger role.

Comprehensive NIPA Data Revisions Positive

Recent years have been kinder to GDP than originally thought. The BEA released its quinquennial comprehensive revisions of the national income and product accounts (NIPA) from 1929 through first quarter 2013. These changes include a re-benchmarking of chained-price 2005 dollar terms to 2009 dollars and broadened reporting of fixed investment, particularly in intellectual property and research and development expenditures.[1] Notably, the BEA revision shows a higher total GDP in recent years. An indexed comparison of GDP levels in Chart 2 before and after the revision shows a slightly less-drastic drop during the 2007­–09 recession and output 0.9 percent higher ($140 billion in 2009 dollars) than previous estimates in first quarter 2013.

Payrolls and Wage Growth Improve, but Slack Remains

While the headline unemployment rate edged down slightly to 7.3 percent in August, additions to nonfarm payrolls came in below median expectations at 169,000 jobs. The August employment report implies a cumulative downward revision of 74,000 new jobs in June and July, leaving a net payroll addition of 95,000. Yet year-over-year nominal wage growth continues to climb from its trough a year ago. Nominal wage growth remains below its 30-year average, reflecting persistent softness in inflation and the effects of high unemployment. As unemployment moves lower toward its natural rate, nominal wage growth should trend back to higher levels (Chart 3).

Mixed Signals from the Business Sector

Manufacturing data provide differing evidence, but overall, the business sector shows promise for the second half of 2013. July durable goods orders fell markedly, 7.4 percent, largely from a decline in motor vehicle and parts production. A broader measure of nondefense capital goods fell 1.5 percent in shipments and 3.3 percent in orders. The headline manufacturing production index and total industry capacity utilization data from the Federal Reserve Board of Governors have edged up since July but are still well below their long-run averages.

Yet the good news seems to outweigh the bad. The Institute for Supply Management (ISM) nonmanufacturing index made a surprising jump in August, reaching 58.6, a level last seen in November 2005, when GDP growth was 3.3 percent. ISM manufacturing readings changed little in August, but the third-quarter average to date (shown by the last observation in Chart 4) is still 5 points higher than the second quarter 2013 average.

Temporary Slowing in the Housing Market

The housing market also sent mixed signals in July, in part due to mortgage interest rates rising in recent months. The 30-year fixed-rate mortgage continued its ascent, to 4.6 percent at the end of August, up 115 basis points since the beginning of May (Chart 5). Sales of new single-family homes declined 13.4 percent in July, and forward-looking single-family housing permits dropped 1.9 percent. While existing-home sales increased 6.3 percent in July, these figures normally lag behind other housing market indicators. However, housing price indexes continue to rise, albeit more slowly. CoreLogic reports that 2.5 million residential properties returned to positive equity in second quarter 2013. Deleveraging household balance sheets and improving credit standards for prime and nontraditional lending are also likely to support the housing market going forward.

The mixed indicators warrant a close eye, but evidence suggests the economy remains on a stable, moderate incline. Tighter government spending, a slowdown in emerging markets and the anticipation of adjustments to the Fed’s large-asset purchases pose downside risks, but markets have likely adjusted and the outlook remains hopeful.

—Camden Cornwell

  1. See “Preview of the 2013 Comprehensive Revision of the National Income and Product Accounts,” Bureau of Economic Analysis, March 2013,
About the Author

Cornwell is a research assistant in the Research Department at the Federal Reserve Bank of Dallas.


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