US: Real growth continues but credit clouds are developing - Wells Fargo

Real economic growth continues but the financial background of monetary and economic policy remains unresolved, warn analysts from Wells Fargo. According to them, credit clouds are developing but whether they will just blow over remains to be seen.

Key Quotes: 

“For the past three months, employment gains have averaged 180,000 while industrial production growth in the first half of 2017 was 2.5 percent. These provide positive signals for sunshine today. Our outlook is for GDP and real final sales growth in the second half of 2017 at 2.5 percent, with solid contributions from the consumer, business and government sectors.”

“As for inflation, we anticipate that the PCE deflator, the Fed’s benchmark, will remain near 1.5 percent, comfortably below the FOMC’s 2 percent target. However, labor costs, as measured by the ECI, will drift upward. Given the growth and inflation outlook, we expect the FOMC to announce the start of balance sheet reductions in September and raise the federal funds rate in December. A more cautious inflation outlook/FOMC policy will allow the trade weighted dollar to continue to decline as foreign central banks begin the process of pulling back on their accommodation. The Bank of Canada (BoC) has already raised its benchmark rate and the European Central Bank (ECB) is continuing to taper.”

“So where are the clouds? First, the FOMC’s reduction in the balance sheet is taking place in the context of a higher funds rate path and increased Treasury deficit financing. Second, consumer/business credit quality and availability is falling.”