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July 2, 2018

News in Charts: US Economic Sentiment Rebounded in May

by Fathom Consulting.

Consumer spending may have risen by less than expected in May, but the US economy looks set to expand at a healthy clip in Q2, despite the ongoing trade disputes between the US and its key trading partners.

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Our US Economic Sentiment Indicator (ESI) jumped from 5.1% to 6.1% in May, the second highest reading in 14 years. We have long argued that the ESI is unlikely to remain at such heady heights indefinitely, and the recent escalation in trade tensions may well cause the ESI to slip back again in June. That said, given the abundance of job openings, rising wages and optimism due to tax cuts, a sizeable drop looks unlikely for now, despite the trade-related uncertainty. Moreover, tensions between the US and its key trading partners has been simmering for months with few clear signs that this has had an adverse effect on sentiment.

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We expect the economy to expand at a brisk pace in Q2, and before Friday’s consumer spending data we had pencilled in official GDP growth of 4.5% annualised. In real terms, spending was unchanged last month, compared to the consensus estimate of a month over month gain of 0.2%. The difference seems to be largely due to an unexpected 9.0% month over month drop in consumption of electricity and gas services. Excluding this item – which can be volatile due to unseasonal weather – real consumer spending increased by 0.2% in May. It would not be surprising if spending on this item rebounds in June, lifting the aggregate figures. Furthermore, economic data released earlier this week showed that the US trade deficit narrowed in May, and that inventories rose in the same month; trade and inventories seem likely to make positive contributions to GDP in Q2.

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The breakdown of the trade data for May showed that exports of foods, feeds and beverages increased by $1.5 billion last month — this alone accounted for nearly half of the narrowing in the deficit in May. The boost this will provide to GDP in Q2 is unlikely to be repeated in the coming quarters, especially if China imposes tariffs on US soybeans, as they have threatened to do. Nevertheless, exports of other goods have increased in recent months, while imports have been increasing at a solid clip too, reflecting strong US domestic demand. The upshot is that we are sticking to our GDP growth forecast for 2018 as a whole of 3.2%, which is above the consensus estimate of 2.9%.

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