US Economy in May 2014

The most recent signs indicated solid and mainly consumer-led growth momentum in the US. The labour market improved, wealth factors such as the equity market and the housing market continued rising, and, consequently, consumption followed. The two main factors denting this positive trend were the cold weather in 1Q14 and some weakness in exports, mainly to China. The most recently announced 1Q14 GDP growth number of only 0.1% q-o-q seasonally adjusted annualized rate (SAAR), however, came as a surprise. Moreover, the latest release of trade statistics indicates that the US economy in 1Q14 may have even contracted. The underlying growth trend and particularly the most recent indicators for private household consumption indicate a rebound in 2Q14 and for the rest of the year, but while the negative factors behind the low growth seen in 1Q14 are being considered as temporary, this remains to be seen.

While the 1Q14 number was indeed surprisingly low, the positive aspect of it was again that personal consumption expenditures increased by 3.0% after an already considerable rise of 3.3% in 4Q13. This however seems to have been influenced to a significant extent by healthcare spending due to the Affordable Care Act. Even by adjusting for this effect, consumption shows a good underlying momentum, but it certainly would be lower. Therefore, the GDP dynamic in the current quarter will need close monitoring as the US economy will indeed need a significant rebound in the 2Q to achieve the current full-year growth expectations. For the time being, positive momentum in the labour market, rising equities and continuous improvement in the housing market, together with an ongoing low interest rate environment, continue to support the expectation of a recovery in the remainder of the year from the low rate of expansion in 1Q.

The labour market has continued improving. After the unemployment rate stood at 6.7% for the second consecutive month in March, it dropped to 6.3% in April. Also, non-farm payroll additions grew by 288,000 in April, and March numbers were revised up to 203,000. Negatively, the participation rate fell again to a relatively low 62.8%, matching the previous bottom level of December and considerably lower than the March number of 63.2%. On the other side, the share of long-term unemployed has improved again and now stands at 35.3%, after 35.8% in March, and substantially below the 37.0% seen in February. Moreover, the average hourly earnings grew by 2.3% y-o-y in April, comparably higher than the April inflation rate of 1.5%, creating a real net-wealth effect. These positive labour market developments might have contributed to the US Fed’s recent decision to continue its QE tapering by $10 billion.

Housing prices, which also constitute a very important wealth factor for US households, have continued to rise, but the levels of the past months’ record price increases are decreasing slightly. Data from the Federal Housing Finance Agency (FHFA) show that 3Q13 price rises of 8.4% y-o-y constituted the peak level, while since then, price rises moved lower to stand at 7.7% in 4Q13 and at 6.9% in February, the latest available number. Given the expectation of further rising interest rates and with mortgages being the most influential financing tool for the sector, this is an area that will need close monitoring in the future.

Given the relatively positive developments in the labour market and in household income, consumer confidence was also at high levels recently. The Conference Board consumer confidence index stood at 82.3 in April, only slightly lower than in March, when it stood at 83.9. The University of Michigan consumer sentiment index moved to 84.1 in April from 80.0 in March. This is now the highest level it has reached since July last year, when in 3Q13, the US economy expanded by 4.1%, indeed an encouraging indication.

The purchasing manager’s index (PMI) for the manufacturing sector, as provided by the Institute of Supply Management (ISM), also posted a rising trend once again in April, moving to 54.9 in April after a level of 53.7 in March. Industrial production rose by a healthy 3.8% y-o-y in March, higher than 3.5% y-o-y in February. In addition, the ISM for the services sector, which constitutes more than two-thirds of the economy, rose to 55.2 in April from 53.1 in March.

Given the weak 1Q14 GDP growth, the GDP growth forecast for 2014 has been revised down this month from 2.7% to 2.4%. This implies that the US economy will need to expand at more than 3% for the remainder of the year. Based on the latest indicators, this seems to be achievable, but further challenges should not be ruled out entirely as some uncertainties related to exports and domestic consumption remain.