US economic growth to pick up in H2, headline inflation to accelerate higher in coming quarters

The US economic growth is likely to pick up in the second half of this year following the weak print recorded in the first half. The initial print of the second quarter GDP was quite weaker than projected at 1.2 percent annualized, which was around half the 2.5 percent rate projected, noted Lloyds Bank in a research report.

Furthermore, the first quarter growth was also revised down from the initial reading of 1.1 percent to 0.8 percent. Most of the weakness in the second quarter was because of decline in inventories that negatively contributed 1.2 percent to the overall GDP growth. Residential and business investment also shrank in the second quarter.

On a bright spot, private consumption grew at a faster rate of 4.2 percent, underpinned by solid wage growth and strong employment gains. Admittedly, nonfarm payrolls rose by 292,000 in June and began the third quarter on a similarly strong footing by increasing 255,000 in July.

The US economy is likely to pick up in the second half of 2016, supported by the persistent robust growth in private consumption and an unwinding of the drag to overall growth from inventories, stated Lloyds Bank. However, business investment might continue to be under pressure, if companies assess the outlook of economy as too uncertain. Weak global activity and strong US dollar might also restrict export growth.

“Overall, it now looks likely that US GDP growth will be below 2 percent this year and instead be nearer 1.5 percent, before rising to around 2.2 percent in 2017”, added Lloyds Bank.

Meanwhile, the US Fed’s preferred inflation gauge, the PCE deflator, remained at 0.9 percent year-on-year in June on the headline measure. The core measure, which strips energy and food, also remained the same at 1.6 percent year-on-year. It has remained around the current level in the first half of 2016.

“We expect stronger economic activity and base effects will push both the headline and core measures higher in the coming quarters towards the 2 percent target in 2017”, noted Lloyds Bank.