After the cold snap-related slow-down in the United States’ economy at the beginning of the year, the growth dynamic has regained traction. Moreover, the latest release of the 4Q13 GDP numbers has indicated that firstly, the momentum was better in the fourth quarter than initially indicated, and that secondly, the crucial private household consumption was also higher. Also, the latest job additions have been supportive for this year’s recovery, and the agreement on budgetary issues leading to a less severe fiscal drag all point to a continued recovery for the remaining quarters of the year.
Some downside to current growth estimates could still come from a spill-over of global economic issues, geopolitical events or effects from a further tightening of monetary stimulus. Due to the strength of the US economy and the depth of capital markets, this possibility however, at least currently, seems relatively limited, and it is expected that the US economy itself might turn out to be a vital growth engine for the global economy. While the positive development in the US economy is continuing, there is still a gap between current growth and the economy’s potential output level. This gap, however, could be closed by next year, if the current growth trend continues.
The third and last release of 4Q13 GDP stood at 2.6% q-o-q, seasonally adjusted annualized rate (SAAR), better than the second release number of 2.4% q-o-q SAAR, but still significantly lower than the first estimate of 3.2% q-o-q SAAR. Also, as a comparison, GDP grew by 4.1% q-o-q SAAR in 3Q13. While the 3Q13 quarter numbers have also confirmed a significant recovery from the sluggish 1H13, they have been largely driven by inventory building and to a lesser extent by consumption of private households, which constitutes the main factor for US GDP growth. The latest set of 4Q13 numbers, however, showed an improvement in the composition of GDPsupporting factors. Consumption increased by 3.3%, more than the 22-year average of 3.0% in consumption growth. Private household consumption also provided the largest single contribution to 4Q GDP growth at 2.2 pp. On average, consumption (i.e. private household expenditures), accounted for around 70% of US GDP, thus the current development indicates that the trend is going back to normal.
At the latest meeting of the US Federal Reserve (US Fed), it was highlighted that an interest rate increase could potentially happen earlier than previously directed in its forward guidance. This comes also as a result of the better-than-anticipated US recovery. However, it was emphasised that the situation is still not entirely robust, but that the development so far has been encouraging. This also led to the decision to again reduce the extraordinary monetary stimulus by $10 billion. The continuation of this strategy is supported by the slowly improving labour market with ongoing job additions. Inflation, however, has again retreated somewhat and now stands at only 1.1%, slightly lower than in January at 1.6%. It is obvious that in the past quarter, the inflationary trend, while not alarmingly low, has been clearly below the 2%-level that the US Fed is aiming for. Positively, excluding the volatile price factors of food and energy, inflation stood at 1.6% y-o-y in both January and February.
While the labour market has continued improving, the dynamic is still mixed. After the unemployment rate moved from 6.6% to 6.7% in February, it remained at this level in March. On the other hand, non-farm payroll additions grew by 192,000 in March and positive February numbers were revised up to 197,000 from 175,000 previously. The participation rate has remained at a relatively low 63.2%, but has improved from 63.0% in February and is now increasing from its bottom level of 62.8% in December. The share of long-term unemployed has also improved and now stands at 35.8%, substantially below the 37.0% seen in February.
The purchasing manager’s index (PMI) for the manufacturing sector, as provided by the Institute of Supply Management (ISM), has also posted a rising trend once again in March after having declined significantly in January to 51.3 due to the cold snap. In February, the important lead indicator improved to 53.2, confirming the view that the January dip might have been temporary. In March, it stood at 53.7. Industrialproduction rose by a healthy 3.0% y-o-y in February, the same level as in January, while manufacturing orders were weak in February, declining by 0.7% y-o-y, after an increase of 1.7% y-o-y in January. On the other hand, the ISM for the services sector, which constitutes more than two-thirds of the economy, rose to 53.1 in March, compared to 51.6 in February.
When reviewing the latest indicators, the momentum leads to considerably higher growth this year, and this should be expected to continue. Consumer confidence, as provided by the Conference Board, reached 82.3, the highest level seen since January 2008. These positive developments have led to a rising GDP growth level this year, which is forecast to be 2.7%, compared to 2013 growth of 1.9%.
