US Economy in March 2014

The United States recovery remains robust, but a slight moderation at the beginning of the year became apparent. Also, the recently announced 4Q13 GDP of 2.4% q-o-q at a seasonally adjusted annualized rate has been lower than initially estimated. The first estimate stood at 3.2%. In the 3Q13, GDP grew by 4.1% q-o-q. While the 3Q numbers have also confirmed a significant recovery form the sluggish 1H13, they have been largely driven by inventory building and, to a lesser extent, by consumption of private households, which constitute the main factor for US GDP growth. The 4Q13 numbers, however, showed an improvement in the composition of GDP supporting factors. Consumption increased by 2.6%. While this compares to a 22-year average of 3.0% growth in consumption growth, the trend is showing clear upside. It is also the highest increase since the 1Q12. As consumption (i.e. private household expenditures) account for around 70% of GDP, this development is important to note.

It remains to be seen if the moderation in the underlying growth trend is ongoing, but it seems that temporary effects have been the main reason for the slightly weaker growth pattern recently. While at the beginning of the year the extremely cold weather was causing inactivity in the economy, the slight slowdown in the 4Q14 (compared to the 3Q13) was due to the fiscal uncertainties in October of last year, when the government shut-down, in combination with the debt ceiling negotiations, was impacting economic activity. Also, the agreement that later on has been found on the most important fiscal issues for the current year, has removed a key uncertainty that was impacting the economy over the last few years.

While the US Federal Reserve Board (Fed) has kept all options open regarding monetary stimulus, it is expected that the tapering of the extraordinary stimulus measures will continue, while key interest rates will remain at the current low level and not rise. The continuation of this strategy is supported both by the slowly improving labour market, which has seen ongoing job additions, and inflation which has been rising again. It stood at 1.5% y-o-y, only slightly below the general 2% level the Fed is aiming for. Excluding food and energy, inflation stood even at 1.6% y-o-y in January.

While the labour market has continued improving, the dynamic is still mixed. The unemployment rate moved from 6.6% to 6.7%, while on the other side, non-farm payroll additions were growing by 175,000 in February – more than expected – and January numbers were revised up to 129,000 from 115,000 previously. The participation rate has remained at a relatively low 63%.The share of long-term unemployed has again risen to 37% from 35.8% in January.

The purchasing manager’s index (PMI) for the manufacturing sector, as provided by the Institute of Supply Management (ISM), has posted a rising trend in most of the past months, with the exception of January, when it fell to 51.3. In February, the important lead-indicator improved again, confirming the view that the January dip might have been temporary and influenced by the extraordinary cold weather. Industrial production rose by a healthy 2.9% y-o-y in January, slightly lower than in December.

Manufacturing orders also pointed at a pick-up in the coming months, growing by 2.0% y-o-y in January. On the other side, the ISM for the services sector – which constitutes more than two-thirds of the economy – fell to 51.6 in February from 54.0 in January. When reviewing the latest indicators, the momentum leading to considerably higher growth this year should be expected to continue. Consumer and business sentiment remains at solid levels, the labour market is also showing a positive trend and investments from the cash-rich private business sector should all lead to a rising growth level this year. This confirms the GDP growth forecast of 2.7%, compared to 2013 growth of 1.9%.