The US economy continues improving in major areas, but from a low base and with budgetary issues potentially re-emerging in the second half of the year. It also remains to be seen how the Federal Reserve Board (Fed) will react to the latest improvement in unemployment numbers, job growth from the private sector and increasing inflation, given the indication it may reduce some if its extraordinary monetary supply measures. Moreover the housing sector — a very important parameter of US wealth and also an important market to follow for policy makers — continues to improve slightly. Inflation is another important guideline for the Fed, and it has also risen towards the level the Fed would like to achieve of around 2% in July, up from 1.8% in the previous month.
Last month, the US Bureau of Economic Analysis (BEA) revised all GDP numbers as far back to 1929. While this has lifted the absolute level of the nominal GDP considerably — by around 3% — the implications for relative changes have been minor, although certainly on some occasions not negligible, particularly for more recent numbers. Total 2012 growth has been revised up from 2.2% to 2.8%, a considerable change for the positive. Moreover, and for this year of even greater importance, the revision of the first quarter number, which stood at 1.8% before the changes, is now only at 1.1%. This represents a growth rate that only matches population growth. Second quarter growth has been reported to stand at 1.7%. On the positive side, this number represents a significant upswing from the first quarter and a positive trend in 2H13 is also being reflected by lead indicators. With a growth potential of more than 3% in the US economy, the current momentum still seems to be relatively lackluster, and based on current indicators it should not be expected to move back to growth potential in the coming year.
Although the first quarter (1Q13) GDP number has been revised down sharply to only 1.1%, it reinforced the assumption of an improving underlying economy, which continues to be supported by strong private household consumption — rising 2.3% on an annualised and seasonally adjusted quarterly growth rate. The majority of the 1Q13 GDP growth rate is based on this, while net exports and government spending were the main negative contributors. The same applies to 2Q13 numbers. While the drag of 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.
This positive trend in the economy is supported by the latest improvements in the labor market, with job additions building up and the unemployment rate continuing to decline. It stood at 7.4% in July. Non-farm payrolls rose by 162,000 in July, slightly less than in June. The share of long-term unemployment increased to 37.0%, but it is still at the second lowest level since November 2009. With improvements in the labor market, consumer confidence shows a healthy trend too. The consumer confidence sentiment index of the Conference Board backtracked very slightly to 80.3 in July from 82.1 in June. The other very important consumer sentiment indicator of the University of Michigan rose to 85.1 in July from 84.1 in June, marking the highest level since August 2007.
The manufacturing sector also continues improving. The purchasing managers’ index (PMI) for the manufacturing sector, as provided by the Institute of Supply Management (ISM), increased to 55.4, after standing at 50.9 in June. Moreover, some recovery in manufacturing has been confirmed by manufacturing order numbers, also a very important lead indicator, which increased by 6.8% year-on-year (y-o-y) in June, after reaching 4.5% y-o-y in May. The ISM index for the services sector — which constitutes more than two-thirds of the economy — also increased to 56.0 in July from 52.2 in June.
While momentum in the first half was significantly impacted by the fiscal drag, the second half is forecast to recover from the relatively lower growth levels of the first two quarters. However, given the revised 1H13 numbers, the 2013 forecast has been lowered to 1.6% from 1.8%. Next year’s growth expectation remains unchanged at 2.5%.