Momentum in the US is ongoing. After already strong GDP growth in the 2Q, at a q-o-q seasonally adjusted annualised rate (SAAR) of 4.6%, the initial 3Q GDP growth level has been reported at a healthy q-o-q SAAR of 3.5%, significantly recovering from the decline of 2.1% in the 1Q14. For the first time since 2012, government spending again contributed more than 20% to US growth, while the contribution of personal consumption expenditures, usually the largest contributor, was only around 35%. This was significantly below its average level of contribution of around two-thirds. In contrast to this drop in personal consumption, net exports improved significantly, leading to a growth contribution of almost 40%, due to strong quarterly export growth of 7.8% q-o-q and negative imports of -1.7% q-o-q. While the development of exports to the EU and Canada was healthy over the last two quarters, exports to OPEC Member Countries also increased significantly in the 3Q, rising by 9.2% q-o-q SAAR, the highest growth rate since the beginning of 2013.
It is forecast that some of this growth dynamic will slow down towards the end of the year and in 2015. But with improvements in both labour markets and consumer confidence levels, a stronger-than-currently anticipated pick-up is possible. This probably could lead to the Federal Reserve Board (Fed) raising interest rates faster than currently expected, and may also have some consequences for growth in emerging and developing countries, especially if we consider the considerable amount of US dollar-denominated investments in these economies.
Despite this positive trend, some uncertainties remain. Given the past year’s experiences with the political challenges over the budget and the debt ceiling, the results of the recent mid-term elections could potentially lead to political ‘gridlock’ and drag the US economy down – especially given the potential need for a renewal of the current debt ceiling by mid-March of 2015 at the latest, which is when the current agreement to suspend the US debt ceiling will once again end.
The labour market, on the other hand, has significantly improved over the past several months and the latest batch of data confirms this. The unemployment rate fell again from to 5.9% in September to 5.8% in October. Non-farm payrolls grew by 214,000 in October, after upward revisions to September’s non-farm job additions of 256,000, while the share of the long-term unemployed remained almost flat at 32.0% after 31.9% in September. The fact that the participation rate remained at a low level and is barely changed from last month at only 62.8%, compared to September’s 62.7%, remains the labour market’s one soft spot.
The housing market continues to recover, but at a slowing pace. Prices in August have risen by 4.8% y-o-y, which is slightly better than the 4.7% y-o-y rise in July, as reported by the Federal Housing Finance Agency. Existing home sales have continued to decline on a yearly base, but have improved on a monthly trend. In September, they fell by 1.7% y-o-y, which is less than the August drop of 5.3% y-o-y. On a positive note, rental and homeowner vacancy rates have declined, while the growth in housing inventories has fallen slightly in the 3Q.
Consumer confidence has improved considerably. After reaching a reading of 89.0 in September, the Conference Board consumer confidence index increased to 94.5 in October. This marks the highest number since October 2007. The Purchasing Managers’ Index (PMI) for the manufacturing sector, provided by the Institute of Supply Management (ISM), has also improved significantly. It was recorded at 59.0 in October, after it had dropped to 56.6 in September from 59.0 in August. In July, it was 57.1. All this underlines the strong momentum in manufacturing activity. The ISM for the services sector, in turn, fell slightly in October to 57.1 from 58.6 in September. While there is some upside potential apparent, the GDP growth forecast for 2014 remains unchanged at 2.1%. The 2015 growth expectation also remains unchanged at 2.6%, given that some uncertainties about the pace of the economic momentum continue to prevail.