Private consumption likely to drive US economy in 2016

In the first quarter, the US economy slowed again at an annualized rate of 0.7 percent q/q. In the past two years, slowdown in the U.S. economy during the first quarter was attributed to severe winters; however, the winter was warm.

Considerable decline in oil prices and the financial turmoil are expected to have impacted greatly. But in spite of the deceleration in the first quarter and subdued jobs report, the economic upturn has not come to an end, said Danske Bank in a research report. The second quarter data that has been released so far has indicated that there is a rebound in the domestic economy.

“We expect the U.S. to grow around 2.0-2.5 percent driven mainly by private consumption,” added Danske Bank.

Moreover, the US economy faces fewer headwinds than earlier: The US dollar has depreciated, oil prices are recovering, credit spreads are lower and the Chinese economy is stabilizing.

However, the UK’s EU referendum is a major risk factor for the US economy as Europe might fall into a technical recession if UK exits EU. As the US economy is not protected from negative shocks from other economies, and subdued growth in Europe might impact US as well.

Moreover, the upcoming US presidential election in November is another political risk factor; however, it is unlikely to considerably impact the US economy.

Growth in private consumption slowed in the first quarter to 1.9 percent q/q, in spite of a boost from low gasoline prices. It is possible that the effect on private consumption from reduced gasoline prices is slower than anticipated earlier. Moreover, financial turmoil at the start of 2016 might have adversely impacted consumption. The savings rate had grown to 5.9 percent in March, highest since 2012-2013.

Even if private consumption had decelerated in the first quarter, May’s retail sales report indicated that private consumption has recovered strongly in the second quarter, underpinning the view that the weakness in the first quarter was just for a brief period of time, according to Danske Bank. Private consumption, based on data released so far, has expanded about 4 percent q/q in the second quarter. Consumption outlook is expected to be positive for coming years.

“The combination of increasing employment, positive real wage growth, housing market recovery and high consumer confidence means that we look for private consumption growth of 2.4 percent q/q AR in coming quarters,” added Danske Bank.