Second Quarter 2016 Review

The U.S. economy accelerated during the second quarter from the previous two quarters, but its performance remained mixed at the sector and industry levels. Consumer spending picked up vigorously, and is expected to lift real GDP growth above a 2% growth rate during the second quarter. Manufacturing also showed some nascent signs of recovery. However, exports, business investment and many commodity and traded goods areas have been generally below average for this point in the business cycle. Business inventories came down somewhat, but were still at elevated levels. The robust U.S. services sector and labor markets also exhibited unsteadiness during the second quarter.

The mixed economic picture is expected to continue during the second half of the year, and potentially into 2017. The economic forecast is for modest real GDP growth in the next year of 1.7%, with areas of the economy that are most dependent on U.S. consumer spending performing the strongest. A slow international economy, potentially weighed down further by the repercussions of “Brexit” on the United Kingdom and other European Union economies, is expected to maintain continued downward pressure on exports and many goods-producing sectors of the U.S. economy. Inflation excluding food and energy, known as “core” consumer inflation, is expected to follow a persistent long-term trend of around 2.0%. The energy and food components will likely remain volatile, although downside risks remain for some areas of energy, materials and traded goods. The dollar is expected to hold much of its gains obtained during the last few years against other major trading partners, due to expected relative strength of the U.S. economy with respect to the international economy.

Brexit will likely make the European Union’s management of high long-term debt, budget uncertainties, weak areas in the European bank industry and the formulation of appropriate monetary and fiscal policies even more difficult in an already challenging environment. In addition to a likely recession in the United Kingdom and some of its closest trading partners, Brexit will likely slow capital investment spending in Europe and in the world economy generally. As a result of slower economic growth and elevated uncertainties, the global interest rate environment will likely remain suppressed at low levels for a longer period of time. While this “flight to quality” delays the return to a more normal interest rate environment of positive real returns for savers, borrowers in the United States will likely benefit via lower financing costs for consumer durable goods and housing in the next year. U.S. job growth is expected to stay on a moderating trend, although compensation growth should continue improving for occupations in relatively high demand. The biggest risks to the U.S. economy in the next year will likely emanate from uncertainties regarding the international economic and political environment. Hence, the arguably multi-faced economy is expected to continue.

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