The American economy is showing its resilience, bouncing back with gusto after a slow start to the year, according to a report by TD Economics, an affiliate of TD Bank, America's Most Convenient Bank®.
"Consumers burst out of the gates in the second quarter, providing a strong impetus to economic growth," says TD Bank's Chief Economist, Beata Caranci. "Supported by accommodative interest rates and rising wages, consumer spending and housing investment will continue to lead economic growth over the second half of this year and into 2017."
With this backdrop in place, job growth is likely to re-accelerate in the months ahead, pushing unemployment to a new low and providing greater full-time job opportunities to those who want them. TD Economics projects economic growth of 1.9 percent in 2016 and 2.1 percent in 2017, enough to bring the unemployment rate from its current level of 4.7 percent to 4.3 percent by the end of 2017.
The job market is stronger than recent headlines suggest...
The resilience of the labor market has been an important factor driving recent economic performance. Ongoing job growth has given support to income gains and consumer spending. Job growth has slowed in recent months, leading some analysts to fret for the ongoing health of the labor market. "These fears are misplaced," says Caranci. "A broad number of indicators continue to show the job market continues to tighten."
Perhaps most encouragingly, job openings remain at record high levels, indicating ongoing demand for labor. Quit rates have also moved up and now sit at pre-recession levels. With strong labor demand and falling unemployment, wage growth has accelerated. Average hourly earnings are up 2.5 percent from a year ago and median wages (of full-time employed workers) are up 3.4 percent.
"Job growth is likely to rebound in the months ahead, but probably not back to the 200,000 level it has been over the recovery so far. We anticipate a more sustainable monthly pace around 150,000 over the remainder of this year and next, reflecting the move to more normal labor market conditions," says Caranci.
Low interest rates support consumer spending and housing investment...
In addition to rising wages, household spending will be supported by record-low borrowing costs. With the recent decline in bond yields, mortgage rates have returned to rock bottom levels last seen before the taper tantrum in 2013.
"As a result of low rates and past deleveraging, household debt service costs are currently sitting near 30-year lows," says Caranci. "With income growth accelerating, they are likely to remain low for the foreseeable future, even as household debt growth is likely to move higher."
Interest-rate sensitive categories of spending like housing, autos, and other consumer durables will continue to perform well over the next year. With strong demand fundamentals, housing construction is also expected to increase.
Federal Reserve will very gradually nudge rates higher
Interest rates are likely to remain accommodative, but with a tightening labor market and rising wages, inflation is also likely to move higher over the forecast. This will spur the Federal Reserve to continue to very gradually push up its policy rate.
"As inflation moves toward the Federal Reserve's two percent target, it will keep downward pressure on real borrowing costs," says Caranci. "This will give the Fed cover to raise rates without removing much accommodation. We anticipate at least one hike in the second half of this year, with two more likely in 2017."
TD Economics provides analysis of global economic performance and forecasting, and is an affiliate of TD Bank, America's Most Convenient Bank®.
The complete findings of the TD Economics report are available online at http://www.td.com/document/PDF/economics/qef/qefmar2016_us.pdf