Despite the most recent turbulence caused by the US budget and debt ceiling negotiations,
including the government shut-down and almost last minute agreement to raise the debt
ceiling until February of next year, the development of the US economy has progressed
better than expected. Advanced GDP numbers from the 3Q were higher than in the 2Q
and the labour market improvements in October have also continued. Lead indicators also
point at a continued acceleration of the economy. However, conditions remain mixed and
some weaknesses in the labour market persist. Declining inflation poses some challenges
for future monetary policy of the US Federal Reserve (Fed).
With the latest short-term agreement on budgetary issues, and the debt ceiling debate
to be postponed again to mid-February, there is some hope that an agreement might be
found in the near future. The debt ceiling now ends February 7 and the funding for the
government is authorized up to January 15. A broader budget agreement will now need to
be found in Congress by December 13, a deadline set by the bipartisan budget
conference. After the latest experience in October, there might be a more fruitful base for
negotiations to avoid another government shut-down and the risk of a federal default. But
given the experience of the past years, any outcome will still be possible, including once
again postponing a broad-based agreement.
The advanced 3Q13 GDP growth level was reported at an unexpectedly high level of
2.8% q-o-q seasonally adjusted annualized rate (SAAR). This was again an increase from
2.5% q-o-q in the 2Q13. However, private household consumption increased only by 1.5%
and the large reliance on the inventory rising has put some risk on 4Q13 numbers to be
lower. Moreover, it remains to be seen how in the consecutive two publications the 3Q
GDP number might also change.
Another important issue is the question of any decision by the Fed upon reducing the
extraordinary monetary stimulus measures it is momentarily engaged in. With potentially
ongoing challenges in Washington, as well as falling inflation (which was at only 1.2% in
September) and the unemployment rate still above 7%, the Fed should be expected to act
probably more cautiously than it indicated in the past months. The Fed’s decision is of a
global importance as this is impacting not only the local economy but, as has been seen by
the global reactions in the past months, it also has the potential of having an unwanted
effect on those economies that have largely benefited from US dollar investments.
The unemployment rate has increased to 7.3% in October, compared to the September
level of 7.2%, and while the job creation numbers have been uplifting, the participation rate
has also again been lower at only 62.8%, the lowest since the 1970s. The still muted —
while improving — labour market situation has also caused consumer confidence numbers
to retreat, which probably might also be a reflection of the uncertainty over the effects of
the government shut-down. The consumer confidence sentiment index of the Conference
Board fell to 71.2 in October from 80.2 in September. The other very important consumer
sentiment indicator of the University of Michigan fell to 72.0 from 73.2.
The manufacturing sector continues improving. The Purchasing Manager’s Index (PMI)
for the manufacturing sector, as provided by the Institute of Supply Management (ISM),
increased to 56.4 in October from 56.2 in September. Also, manufacturing order numbers
have increased by 3.0% y-o-y in September, after 6.5% in August. Industrial production
increased by a healthy 3.2% y-o-y in September, after 2.8% y-o-y in August. The ISM for
the services sector — which constitutes more than two-thirds of the economy — increased
to 55.4 in October, from 54.4 in September and, therefore, remains at a high level.
The very important housing sector continues to provide mixed signals, seemingly still
negatively impacted by rising mortgage rates. Pending home sales fell again in
September by 5.6% m-o-m August. They declined by 1.6% in August, 1.4% in July and
also stood at minus 0.4% in June, according to the National Association of Realtors.
Pending home sales are considered to be a leading indicator of progress in real estate
because they track contract signings. Positively, the yearly change of the house pricing
index of the Federal Housing Finance Agency (FHFA) has continued at a high level
and remained almost unchanged at 8.5% in September, only slightly lower than the
August level of 8.6%.
While the momentum in the 1Q seems to have been significantly impacted by the fiscal
drag, the performances of the 2Q and 3Q have pointed at some improvements.
However, the ongoing fiscal uncertainty, lowered consumer confidence and the still
slow improvements in the labour market lead to unchanged GDP growth assumptions.
They remain at 1.6% for 2013 and 2.5% for 2014.