US Economy – July 2013

The US economy continues to expand at low levels and below its estimated current growth potential of more than 3%. The latest and final first quarter of 2013 (1Q13) GDP estimate of only 1.8% was much below the previous estimate of 2.4%, and while momentum in the second quarter is forecast not to exceed this level, there are signals that the economy will see some acceleration in the second half of 2013. Given the rise in recent manufacturing orders and the increase in other lead indicators, this seems to be a likely scenario. The labour market is also continuing to improve, leading to better consumer sentiment.

Major uncertainties, therefore, are coming primarily from any near-term decision of the Federal Reserve Board (Fed) to taper off its monetary support measures. This is expected to take place gradually and particularly, when considering that inflation remains low and that the Fed aims at a rate of around 2%. Another important uncertainty is the fiscal issues that remain unsolved, i.e. budget negotiations for 2014 and the likelihood that talks about raising the debt ceiling will need to be resumed in the second half of the year.

While the 1Q13 GDP number has been revised down sharply to only 1.8%, it still supports the assumption of an improving underlying economy, which continues to gain strength from strong private household consumption, which rose 2.6% on an annualized and seasonally adjusted quarterly growth rate. This added the most to the 1Q13 GDP growth rate, while net exports and government spending were the main negative contributors. While the drag caused by governmental spending is forecast to continue for some time, private household consumption should lead to higher growth levels in the second half of 2013 and in 2014.

Positive development is also supported by the latest improvements in the labour market, with job additions continuing to build, and the unemployment rate remaining at 7.6%. Nonfarm payrolls rose considerably again by 195,000 in June to stay at the same level as in May. The share of long-term unemployment declined to its lowest level since November 2009 to 36.7%, again lower than the May number of 37.3%. With improvements in the labour market, consumer confidence has also increased once more. The consumer confidence sentiment index of the Conference Board moved to 81.4 in June after reaching 74.3 in May, the highest level of the indicator since February 2008. The same applies to the other very important consumer sentiment indicator of the University of Michigan, which stood at 84.1 in June, only slightly lower than the May number of 84.5.

While this paints an encouraging picture, the manufacturing sector still feels the drag of fiscal consolidation, though this is improving. The purchasing managers‘ index (PMI) for the manufacturing sector, as provided by the Institute of Supply Management (ISM), increased to 50.9 in June from 49.0 in May. Moreover, some recovery in manufacturing has been confirmed by manufacturing order numbers — also a very important lead indicator — which increased by 3.6% y-o-y in May, after clocking 0.8% y-o-y in April. The ISM for the services sector — which constitutes more than two-thirds of the economy — fell slightly, however, to 52.2 in June from 53.7 in May.

While momentum in the first half is forecast to be significantly impacted by fiscal drag, the second half is forecast to recover from relatively lower growth levels experienced in the first two quarters. The 2013 forecast, therefore, remains unchanged at 1.8%. Next year‘s growth expectation remains uncertain, given the ongoing deadlock over budget issues and the need to finalize the 2014 budget in Congress, as well as the likelihood of upcoming debt ceiling negotiations in the second half.

While growth potential for next year is estimated to be somewhat above 3.0%, remaining fiscal issues — in combination with reduced monetary support by the Fed — leads to a 2014 forecast of 2.5%. In the case of a positive outcome for budget negotiations in the near future, however, and a consequently improving investment climate, growth numbers could be higher than this initial estimate. However, fiscal drag from growth potentials of around 0.7% in the next year, compared to the negative fiscal impact of 1.5% in the current year, seems sensible, given the budgetary uncertainties of the past years.