US economic growth at lowest level since 1949

 
The overall investment environment has been hampered by slack growth overseas. Fortunately, increases in household expenditure have propelled US economic growth above the negative trends that we are seeing. Weaknesses remain in the energy sector and the manufacturing sector. Analysts were expecting the US economy to grow at a rate of 2.5% (GDP) but the actual performance has slumped over the past three financial quarters to around 1.2%. In terms of overall contributions to Q2 gross domestic product, consumer expenditure added 2.8%, trade 0.2%, government expenditure -0.2%, fixed investment -0.5% and inventories -1.2%. The GDP figure will likely improve when government expenditure, fixed investment and inventories move into positive territory.

CME Group FedWatch Bearish on Rate Hikes at Upcoming FOMC Meetings
As a result of these new economic realities, the Federal Reserve Bank may be less inclined to stimulate the economy vis-a-vis quantitative easing. For the Fed, however, the state of the global economy remains far more important than the slower domestic growth. According to Williams of the Fed, rate hikes are likely to take place towards the end of 2016 once the volatility in global markets abates. According to the latest CME Group Fedwatch analysis, there is an 88% likelihood of the federal funds rate remaining in its current range of 0.25–0.50%, and a 12% likelihood of an interest-rate hike of 25-basis points to 0.75% on September 21. Extrapolating through 2 November and 14 December, the likelihood of a 25-basis point rate hike is 12% and 30.1%, respectively.
Fortunately for the US economy, personal consumption expenditure makes up 68% of GDP. Goods purchases comprise 23%, whilst services make up 45%. GDP is also made up of 16% from private investment and government investment, and consumption makes up the remaining 18%. Net exports have had a negative effect on GDP owing to the fact that the US imports more than it exports (16.5% imports versus 13.5% exports). That personal consumption expenditure added 2.83% to economic growth is substantial given that it was just 1.11% in Q1. This marks the highest contribution of PCE to GDP in 6 financial quarters.
On a positive note, exports increased by 1.4%, following negative movements over the past three financial quarters. The lacklustre performance of the US economy has not discounted the likelihood of a rate hike in 2016, but it simply makes it more improbable that the federal funds rate will increase to 0.50–0.75%. The GDP reading released on Friday, July 29, carries some ominous undertones in the form of an average growth rate of 1% for the year. While Wall Street was forecasting Q2 GDP growth of 2.6% and the Fed was overly optimistic in its assessment of the US economy, the actual numbers are daunting. The Federal Reserve Bank in Atlanta was closest in terms of its forecast of GDP with a figure of 1.8%.

Fed Rate Hikes May Not Happen in 2016
Economists across the board are now taking an increasingly dovish approach to the likelihood of a Fed rate hike in 2016. The June 23 referendum in the U.K. remains a key concern for global economic growth prospects and a strengthening of the USD will do little to boost confidence in emerging markets or developed economies. Sentiment has soured in the futures markets where the Fed Funds Futures displayed a 34.4% likelihood of a rate hike in 2016. Prior to the release of Q2 GDP data, the Fed Funds Futures indicated a 50% likelihood of a rate hike this year. Recall that the Federal Reserve Bank had maintained interest rates near zero (0–0.25%) for eight years since the crisis in 2008. This was done in an effort to increase the velocity flow of money through the economy by making loans and investments affordable.
Spearheading the bearish side of GDP performance has been business investment. This integral component of the economy declined by 2.2%, while gross private domestic investment numbers plunged by 9.7%. Residential investment which had heretofore been a bullish component of GDP, reversed direction and was down 6.1%. Headline jobless numbers have been declining, but this is largely due to weakness in the LFPR (Labour Force Participation Rate). While the slack in the labour force is tightening, the US economy is not growing at an adequate rate. Private consumer spending remains the driver of economic growth, and as long as consumer sentiment remains positive, GDP numbers will continue to impress. Concerns are mounting as weakness in restaurant revenues and poor automobile sales figures are making their way to the markets. While the recession may be a ways off yet, poor economic growth is certainly a reality that investors have to contend with.

Takeaways from the Recent GDP Figures
The Commerce Department indicated that the inflation-adjusted GDP growth rate (year-on-year) is 1.2% for Q2. However, if we look at economic growth for 2016 in total, it is now just 1%. This marks the weakest performance of US GDP in five years. The annual average rate of GDP growth is now 2.1% since the 2008 recession, and this marks the worst performance in over 65 years. While the personal consumption remains strong with increasing numbers of new home sales, declining unemployment (4.9%) and increasing wages, the downside is particularly worrisome. This is the third quarter on the trot of decreasing business investment, and decreasing government expenditure with a concomitant decline in inventories.
Among economists, the hope remains that Q3 GDP economic growth will be positive. Wall Street indices are not helping to allay the fears of investors with the S&P 500 index companies reporting declining profits for the fourth quarter in a row. According to Thomson Reuters, earnings are expected to come in 1.2% lower. If we observe the performance of the US economy during key expansions, this current growth rate is the weakest since 1949-1953.
• GDP growth increased by 7.6% in 1949-1953
• GDP growth increased by 4% in 1954-1957
• GDP growth increased by 5.6% in 1958-1960
• GDP growth increased by 4.9% in 1961-1969
• GDP growth increased by 5.1% in 1970-1973
• GDP growth increased by 4.3% in 1975-1980
• GDP growth increased by 4.4% in 1980-1981
• GDP growth increased by 4.3% in 1982-1990
• GDP growth increased by 3.6% in 1991-2001
• GDP growth increased by 2.8% in 2001-2007
• GDP growth increased by 2.1% in 2009-2016
It’s not all doom and gloom for the US as major investment powerhouse, JP Morgan Chase & Co. decreased its risk of recession between now and 2017 to just 30%, from a high of 37% in July. The US economy is providing mixed messages to the market, and uncertainty remains about whether Fed rate hikes will take place in 2016 as FOMC policymakers and officials believe they will. It doesn’t help that the US is about to enter its most contentious presidential race, perhaps in history. GOP front-runner Donald Trump and Democratic nominee Hillary Clinton will be squaring off against one another in the November 8 general election. With such stark differences between their policies, the economy is bound to be the most important driver in the election cycle.

Note that this column does not constitute financial advice.