The fact that there was a downward revision to 1Q14 growth, from only 0.1% q-o-q seasonally adjusted annualized rate (SAAR), did not come as a surprise. However, the magnitude of a revision to -1.0% q-o-q SAAR was unexpected and larger than projected. While most of the impact might be attributable to the unusual cold weather at the beginning of the year, there have been some elements of an underlying drag, mainly coming from the negative impact from exports to China. For the remainder of the year the economy is expected to rebound strongly and to grow by more than 3%. But despite current positive signals, some uncertainties remain.
The labour market has continued improving. This positive momentum has also pushed consumer confidence and the very important private household consumption (which accounts for around two-thirds of the economy), which was again showing a supportive trend even in the 1Q14 with a growth rate of 3.1% q-o-q SAAR, after a high rate also in the 4Q13, when it stood at 3.3% q-o-q SAAR. Some distortions, however, in this healthy trend might have been influenced by healthcare spending due to the Affordable Care Act. But even if an adjustment is made for this positive effect, consumption shows a good underlying momentum. Therefore, the GDP dynamic in the current 2Q14 will need close monitoring as the US economy will, indeed, need a significant rebound – not only in the second quarter but also in the second half – in order to achieve the current growth expectations for the year. So far, the positive momentum in the labour market, as well as rising equities and the ongoing rise in house prices, continue supporting the expectation of a recovery in the remainder of the year from the low rate of expansion in the 1Q14.
The labour market has continued improving. After standing at 6.7% for the second consecutive month in March, the unemployment rate dropped to 6.3% in April and remained there in May. Also, non-farm payroll additions grew by 217,000 in May, after 282,000 in April, again showing solid growth. Negatively, the participation rate remained at 62.8% for a second consecutive month, lower than the March number of 63.2%. On the other hand, the share of long-term unemployed has improved again and now stands at 34.6% after reaching 35.3% in April. But this is substantially below the 37.0% seen in February.
House prices, which also constitute a very important wealth factor for US households, have continued to rise. But the record high levels of the past months are coming back a little bit. Data from the Federal Housing Finance Agency (FHFA) shows that 3Q13 price rises of 8.5% y-o-y constituted the peak level, while price rises since then have moved lower to stand at 7.7% in 4Q13 and at 6.9% in 1Q14, with the latest available number for March at 6.5%. 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 development in the labour market and in household income, consumer confidence also remained at solid levels recently. The Conference Board Consumer Confidence Index stood at 83.0 in May, after 81.7 in April, only slightly lower than in March, when it stood at 83.9. The University of Michigan Consumer Sentiment Index moved back a little bit to 81.9 from 84.1 in April.
The Purchasing Managers’ Index (PMI) for the manufacturing sector, provided by the Institute of Supply Management (ISM), also posted a rising trend once again. It moved to 55.4 in May after a level of 54.9 in April. Industrial production rose by a healthy 3.5% y-o-y in April, almost the same level as in March when it rose by 3.9% y-o-y. In addition, the ISM index for the services sector, which constitutes more than two-thirds of the economy, rose to 56.3 in May from 55.2 in April. Given weak 1Q14 GDP growth so far, near-term developments will provide more indications if the current GDP growth forecast for 2014 of 2.4% remains achievable.
This would imply that the US economy will need to expand at almost 4% for the remainder of the year – which is, indeed, a challenging task.