US Economy in February 2015

The positive growth trend in the US continues, but most recent indicators suggest that the strong growth seen in the 2Q and the 3Q of 2014 is unlikely to be maintained. After a seasonally adjusted annualized rate (SAAR) of 4.6% q-o-q in the 2Q and a SAAR of 5% q-o-q in the 3Q of last year, the first estimated GDP growth rate for the last quarter in 2014, as provided by the Bureau of Economic Analysis, stood at a SAAR of 2.6% q-o-q. While this is still a solid number, it ties into many of the slightly weakening indicators of recent months. Industrial production, manufacturing orders and retail sales were all declining in December, which came as a surprise to many observers. This will need close monitoring in the coming months to see if these declines were merely temporary dips or if there are some more serious underlying challenges. One issue that emerged in the past several months was the low earnings growth within the labour market, with average monthly earnings in December declining by 0.2% m-o-m, the first decline since March 2014. However, the considerable rebound of 0.3% m-o-m in January, may suggest that this was a temporary dip.

In general, the US economy is improving, supported by the ongoing positive trends in job creation, rising house and equity prices, and other income-related factors that in the past year have led to rising consumption. This remains the most important driver of US economic growth. Depending on further developments in the earnings situation, rising private household consumption is forecast to lead to rising GDP growth in the current year. Personal consumption has stood at a SAAR of 3.2% q-o-q in the 3Q and 4.3% in the 4Q of last year. This could be taken as a positive sign of growth in 2015. In its most recent Federal Open Market Committee (FOMC) statement, in which it sets out its decision on future monetary policy, the US Federal Reserve (Fed) has become more upbeat. The statement notes that the US economy is expanding at a solid pace and that labour market improvements are strong. It also notes that relatively lower energy prices are acting as a supportive factor for consumer spending. While these observations might lead to an interest rate increase at about mid-year, the current disinflationary trend and recently declining earnings growth – as well as falling lead indicators and output numbers – are all aspects that will be taken into consideration before any decision is made. In addition, as in the past, after this latest meeting the Fed has noted that it will also continue to observe international economic developments and consider the possible impact of an interest rate increase on the global economy before taking a final decision. Among these international developments is the swift rise of the US dollar against other major currencies, which would negatively impact US exports.

The labour market has significantly improved over the past months and the latest batch of data confirms this trend. While the unemployment rate increased slightly to 5.7% in January, non-farm payrolls grew by a stronger-than-expected 257,000 in January, after upwardly revised 329,000 non-farm jobs from December. The share of long-term unemployed declined to 31.5% in January and also the participation rate improved, rising to 62.9%. Moreover, seasonally adjusted hourly earnings recovered somewhat in January, growing by 2.0% y-o-y, comparing to 1.9% in December. On a monthly base earnings improved by 0.3% m-o-m, compared to the December decline of 0.2% m-o-m.

The housing market continues to recover and while the pace of the recovery was slowing in the past months, the rise in prices in November – the latest available data point – has been even higher at 5.3% y-o-y compared to October, when the rise in prices stood at 4.4% y-o-y, as reported by the Federal Housing Finance Agency. Existing home sales have also continued improving in December, growing by 3.5% y-o-y after a November level of 1.9% y-o-y.

Consumer confidence rose to a new record high of 102.9 in January, compared to 93.1 in December, based on the index provided by the Conference Board. A sign of deceleration, however, was apparent in the purchasing manager’s index (PMI) for the manufacturing sector, as provided by the Institute of Supply Management (ISM), which fell to 53.5 in January from 55.1 in December. The PMI for the services sector, which contributes more than 70% to the economy, edged up slightly to 56.7 in January from 56.5 in December.

Given the latest signals from output and lead indicators that the depth of the recovery in the current year remains, to some extent, uncertain, the GDP growth forecast for 2015 remains unchanged at 2.9%. However, this year's growth forecast is already at a much higher level than the final growth estimate of 2.4% in 2014, as provided by the Bureau of Economic Analysis.