Fears of a sharp economic downturn in the United States — fuelled by a string of below-forecast economic reports in recent weeks — are overdone and unlikely to deter further interest-rate hikes this year, economists said Monday.
Worry of about the sustainability of the current U.S. rebound has been building following a series of below-consensus readings, most recently last week's weaker-than-expected non-farm payrolls figures for June.
But, TD Securities described those concerns as “overdone” in a recent report to clients and suggested only a breather in an otherwise healthy recovery.
“Talk of a sharp downturn is now peppering the headlines,” TD Securities said in its daily note to clients.
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“However, we do not believe there is enough evidence to seriously question the sustainability of the U.S. recovery.”
Last week, the U.S. Department of Labour reported that June non-farm payrolls grew by 112,000 jobs, well below the 250,000 positions economists had been forecasting.
The market was equally disappointed when readings on May durable goods orders fell by 1.6 per cent — compared with the 1.5-per-cent increase most economists had been expecting — and first-quarter gross domestic product growth was revised down to 3.9 per cent at an annual rate, from previous estimates of 4.4 per cent.
“Most of these weak readings followed strong gains in the previous months and should be regarded as little more than a pause in what are otherwise strong trends,” TD Securities said.
Royal Bank of Canada assistant chief economist John Anania also noted that “last week's data may have surprised market participants in the sudden softness they flagged.”
However, he said, the slowing seen in recent indicators shouldn't come as a shock.
The pace of growth over the previous four quarters, he said, was consistent with that seen in an economy in its recovery phase and would be unsustainable over the long term.
“The U.S. economy is now entering the expansion phase of the business cycle that is typically characterized with trend growth rates near 3 per cent,” Mr. Anania said.
“Economic indicators will likely recover from recent weakness, which is, in part, a correction from very high readings in previous months but are unlikely to surpass those previous highs.”
The exception, he said, could be the U.S. labour market where big gains in productivity at the expense of hiring suggests that “more big labour gains” are likely in coming months.
For the Federal Reserve — which last week raised interest rates for the first time in four years, hiking borrowing costs by a quarter percentage point — the likelihood is that the central bank will continued with its vow of “measured” rate hikes in the future.
However, he also said hints of brewing inflation and the probability that price pressures will accelerate into the early stages of the current expansion suggest more aggressive moves — in the form of half percentage point rate increases — could be in the cards.
“Monetary policy remains excessively slack at this time,” he said.
“The need to bring interest rates back in line with growth rates typical of an expansion in an environment of rising inflation and little to no excess capacity has become more immediate.”