These are the personal views of Thomas Lam, group chief economist at OSK-DMG:
Notwithstanding the intense limelight on the June U.S. labor market data, the breadth of the release fails to solidify expectations of near-term Federal Reserve policy.
While the headline nonfarm-payrolls figure of 80,000 in June remains soft, the details of the report seem less soggy.
Some forward-looking indicators such as temporary hiring, average workweek and manufacturing (nonsupervisory and production) overtime hours improved in June. For example, the positive reversal of six minutes in the overall workweek to 34.5 hours, according to our estimation, is roughly tantamount to an increase of 311,000 private payrolls.
Still, relevant details from the June employment report coupled with our assumption of a recovery in productivity growth seem consistent with second-quarter real GDP growth in the vicinity of 1.5%. The slower growth momentum in the second quarter also aligns well with the early guidance from our proprietary indicator–which harnesses mostly weekly and daily data, the High-Frequency Activity Tracker–which suggests that second-quarter growth could print closer to a 1.6% annual rate.
But the available source data for GDP aggregation through May do not indicate one-sided loss of momentum. Real business fixed investment (for capital expenditure and for structures) appears to show some recovery for the second quarter, consistent with our forecast of roughly 7% growth. Moreover, our measure of capex expectations is inconsistent with a noticeable downshift at this time.
Our forecast for real residential investment, while more moderate, is still for a decent pace of just under 10%. While the hard data in April and May imply that real consumer spending growth stepped down to a roughly 1.5% annual rate, we have lowered our forecast less aggressively to 1.9% for the second quarter from 2.5% previously. (This is partly due to the unusually sizable revisions in the May retail sales release; the June release on July 16 should add clarity to our forecast.)
Finally, we expect the more-difficult-to-pin-down categories–net exports, inventory change and government spending–to collectively subtract around 0.5 percentage point from growth in the second quarter, slightly less than the overall drag in the prior quarter. In light of the data nuances, though with risks still tilted to the downside, we have tweaked our second-quarter real GDP growth forecast to a 1.7% annual rate from 1.9% earlier.
Although we continue to expect a modest recovery in the second half of 2012 to slightly above 2% growth, the key risk to our forecast at this time is the ongoing tightening in financial conditions, resulting from the quagmire in the euro zone. Our Financial Market Conditions Index, which measures broad market conditions in the U.S., has fallen to roughly flat in June from positive territory since January. A simple scenario analysis suggests that if the deterioration in broad market conditions intensifies linearly, all else equal, then GDP growth could possibly weaken to almost flat by first-quarter 2013.
On the other hand, if market conditions stabilize and improve linearly, all else equal, then growth would probably hover at slightly more than 2% through first-quarter 2013. Given the slower near-term growth momentum and increasing risks from the ongoing deterioration in financial conditions of late, we have compressed our growth outlook marginally for subsequent quarters, approximately by another tenth to two-tenths of 1%. In particular, our revised forecast anticipates third-quarter 2012, fourth-quarter 2012 and first-quarter 2013 growth to come in at 2.2%, 2.1% and 1.6%, respectively.
Although the revisions do not alter our full-year average 2012 real GDP growth forecast, which remains at 2.1%, our 2013 growth projection has been lowered a touch to 2.1%, from 2.2% previously.
Write to Thomas Lam at email@example.com