Expectations in Economics

As we approach the end of the third quarter, the U.S. economy maintains a strong position among its peers in the industrialized world. The Federal Reserve is on track to complete its asset purchase program shortly, and there are widespread signs of continued economic expansion.

We ushered in September with a string of strong economic reports, from purchasing managers surveys to auto sales to construction spending, but the August employment report dampened the euphoria somewhat. However, it is premature to draw strong and definitive conclusions from a single month’s employment data. 

We expect the U.S. economy to advance at a steady pace during the balance of this year, with all major components of gross domestic product (GDP) making a positive contribution. Our expectation for a very solid 2015 remains in place. 

Real consumer spending slipped in July (-0.2%), inclusive of weakness in purchases of both goods and services. The significant increase in auto sales during August (17.5 million units versus 16.5 million in July) is a partial offset that will help lift overall consumer spending in the third quarter. Support from gains in household wealth due to higher equity and home prices should not be overlooked. 

Sales of existing homes moved up in each of the last four months, but purchases of new homes stalled. The Mortgage Purchase Index of the Mortgage Bankers Association maintains a declining trend since June. Although mortgage rates are attractive, the housing sector remains challenged by the credit constraints associated with mortgage re-regulation. 

A small turnaround in federal government spending after more than three years of decline is embedded in the forecast. State and local government spending should show stronger gains than federal government spending. Fiscal year 2014 should end with the federal budget deficit as a percent of GDP (2.9%) at the lowest level since 2007. 

Exports posted a strong performance in the second quarter, but imports...