The US economy has gained considerable pace in the past two quarters with 3Q GDP growth at a seasonally adjusted annualized rate (saar) of 3.9% q-o-q in 3Q14 and 4.6% in 2Q14. This dynamic should be expected to continue in the coming year, given that most of the important parameters in the labour market have supported this momentum and consumption should be expected to keep this positive trend going. Private consumption expenditures were the main contributor to this growth number at 1.5 percentage points (pp) growth contribution, followed by gross domestic private investments at 0.9 pp, and net exports and government consumption both contributing 0.8 pp. Some questions remain on the ability to avoid a potential political gridlock after the recent mid-term elections, but the now clear majority situation in both houses should provide a better base for future political negotiations.
However, among some, one major uncertainty remains, which is how the Federal Reserve Board (Fed) may decide upon its monetary policy in the near future, given the current economic improvements in the US economy. This situation may lead to an earlier-than-expected start in the interest rate raising cycle. While currently it is generally expected that the Fed will not start before the middle of next year to raise interest rates, quicker-than-anticipated improvements in the economy may lead to an earlier lifting of interest rates, probably by the end of the 1Q15 meeting in mid-March or the beginning of the 2Q15 meeting at the end of April. This again may have some effect on emerging economies as this may lead to capital flows as seen in mid-2013. Emerging economies might be better prepared for an interest rate rise in the US dollar this time. However, parts of the private sector that are indebted in US dollar denominated loans might face considerable stress if interest rate rises are quick and higher than expected. This is a topic that has been highlighted recently by the Bank of International Settlement (BIS) in its quarterly review.
The labour market has improved significantly over the past months and the latest batch of data confirms this trend. The unemployment rate remained at 5.8% in November. Non-farm payrolls grew by 321,000 in November, after an upward revision of 243,000 in non-farm job additions in October. The share of long-term unemployed fell to its lowest point since June 2009 and recorded 30.7% in November after 32.0% in October. Some softness in the labour market remains, given the fact that the participation rate remained unchanged from the last month at a low level of 62.8%.
The housing market continues recovering, but at a slowing pace. Prices have risen by 4.3% y-o-y in September, after 4.8% y-o-y in August, as reported by the Federal Housing Finance Agency. Existing home sales have continued improving in October, when they rose by 2.5% y-o-y, the first yearly increase since October of last year. Vacancy rates have declined for both rentals and home-owner properties in 3Q14 to stand at 7.4% and 1.8%, respectively.
Consumer confidence remained at a high level of 88.7 in November, only slightly below the October 94.1 level, based on the Conference Board’s consumer confidence index. The October level now marked the highest number since October 2007. The purchasing manager’s index (PMI) for the manufacturing sector, as provided by the Institute of Supply Management (ISM), has also remained barely unchanged. It stood at 58.7 in November and almost matched the October number of 59.0. The ISM for the services sector, which contributes more than 70% to the economy, increased considerably to 59.3 in November, after an already high reading of 57.1 in October.
Some upside potential is becoming visible and the details of the GDP growth forecast will be reviewed in greater detail in the coming month, with the latest data also being available then. In the current month, the 2014 growth forecast has been lifted slightly to 2.2%, from 2.1% in the past month, while the 2015 growth expectation remains unchanged at 2.6%.