Here's Why Neil Dutta Feels Good About the US Economy

Burgess COMMENTARY

Peter Burgess

Here's Why Neil Dutta Feels Good About the US Economy

The following is a summary of our recent interview with Neil Dutta, Head of Economics at Renaissance Macro Research, which can be accessed on our site here or on iTunes here.

On Wednesday's podcast, RenMac's Neil Dutta reiterated his view from earlier this year that the US is not facing an imminent recession.

'I feel pretty good about the economy,' he told listeners, 'and I think the big story coming out of Q2 has been the sharp rebound in consumer spending.'

Here's a chart showing how consumer spending has behaved over the past 5+ years with the recent second quarter uptick:

consumer spending Source: Bloomberg

A large part of his bullish outlook for the remainder of this year is based on a healthy pace of consumer spending and the close tie this has with a strengthening US housing market. Here, he explains:

'Home sales in both new and existing have been picking up and if households or individuals are signing contracts on new homes, I think it's going to benefit consumer spending going forward because once you sign a contract on a new house, you buy furniture and appliances and floor coverings and household products after doing so; so I think that sets a good tone to the outlook for consumer spending in the second half of the year. So, if US consumers are hanging in there, then I think the economy is going to be fine.'

As you can see, the uptrend in housing is still intact and doesn't appear to be rolling over:

new existing home sales Source: Bloomberg

When asked about the huge miss on employment for the month of May and whether this was cause for concern, he blamed it on a decline in hirings but not on actual layoffs. If layoffs do start to pick up, raising the chance of recession, it'll be reflected in jobless claims, which, he said, remain low.

jobless claims Source: Bloomberg

One concerning trend that we spoke with him about is the major decline in business investment, which is now contracting at levels usually seen during a recession.

business fixed investment Source: Bloomberg

Neil did not think this will persist but forecasted a slight rebound in the second half of the year since a large part of the deterioration was likely caused by factors that 'aren't as big of an issue anymore.' Here he says:

'It's important to remember that most of the recent weakness in investment spending occurred sometime starting in the third or fourth quarter of 2014 and that's notable because that's when a lot of market jitters started, whether it was the appreciation of the dollar, the sell-off in commodity markets, the tightening of corporate credit—all of those things began really around the third or fourth quarter of 2014. So part of the recovery I think is going to be driven by the fact that those aren't as big of an issue anymore. You've seen some narrowing of corporate bond spreads, you've seen some rally in the commodity markets, you've seen the dollar certainly selling off against a number of currencies both developed and emerging and I think that's going to help not only the corporate earnings picture but also the outlook for investment spending.'

That being said, Neil did note, however, that 'this is a recovery I think you want to keep on a short leash' since 'the real turn for investment spending will happen when attitudes around the global economy pick up in a more meaningful way,' which is still a 'very tenuous proposition,' he said.

For a complete archive of our podcast interviews on finance, economics, and the market, visit our Newshour page here or iTunes page here. Subscribe to our weekly premium podcast by clicking here.