Some moderation in US 4Q14 GDP growth became apparent recently. However, this came after two consecutive strong quarters, so this should not have come as a surprise. Nevertheless, the level of growth was somewhat disappointing as it was expected to be higher. GDP growth in 4Q14 stood at a seasonally-adjusted annualized rate (saar) of only 2.2%, after reaching 4.6% q-o-q in the 2Q14 and 5% q-o-q in 3Q. This ties into many slightly weakening indicators seen in recent months.
Industrial production, manufacturing orders and retail sales have all been slowing. And while industrial production recovered slightly in January, manufacturing orders and retail sales have remained clearly in the negative. Moreover, the strength of the US dollar may negatively impact exports in the current year. Also, the potential for an interest rate hike by the Federal Reserve Board (Fed) raises questions since it could be an influential factor for future growth. While it is expected that any increase in the interest rate will only be done after a careful consideration of the domestic economy’s performance, and the impact that such a rate hike might have on the global economy, it is not clear how markets will react once a policy change becomes likely.
On the positive side, the labour market continues improving, consumer sentiment is at record levels and private household consumption continues growing solidly. This should keep growth going. But, given the many slowing dynamics, in combination with the mentioned challenges, the magnitude of this year’s GDP growth remains uncertain to some extent.
In general, the US economy is improving, supported by an ongoing positive trend in job creation, rising house and equity prices, and other income-related factors that have, in the past year, led to rising consumption. This remains the most important driving force for US economic growth. Although it depends on the further development of the earnings situation and other wealth-related factors, the rise in private household consumption is forecast to lead to rising GDP growth in the current year. Personal consumption stood at a saar of 4.2% q-o-q in the 4Q14, after registering 3.2% q-o-q in the 3Q, which could be taken as a positive sign for growth in 2015.
The labour market has significantly improved over the past months and the latest batch of data confirms this trend. The unemployment rate fell to 5.5% in February. Non-farm payrolls grew by 295,000 in February, higher than in the previous month, when they stood at 239,000. The share of long-term unemployed improved to 31.1% from 31.9% in February.
The housing market continues recovering and while the pace of the recovery was slowing in the past months, prices in November and December, which are the latest available data points, have started to increase again at higher rates. Prices increased by at 5.5% y-o-y in December, after registering 5.2% y-o-y in the previous month, as reported by the Federal Housing Finance Agency. Positively, existing home sales have also continued improving, rising by 3.2% y-o-y in January and by 4.3% y-o-y in December.
Consumer confidence rose to a new record high of 103.8 in January and receded only slightly in February to 96.4, the latest available number, based on the index provided by the Conference Board. As a sign of deceleration, however, the purchasing manager’s index (PMI) for the manufacturing sector, as provided by the Institute of Supply Management (ISM), fell again slightly to 52.9 in February from 53.5 in January. Positively, the ISM for the services sector, which contributes more than 70% to the economy, edged up marginally to 56.9 in February, from January’s level of 56.7.
The GDP growth forecast for 2015 remains unchanged at 2.9%, given the latest signals from output and based on lead indicators that suggest that the depth of the recovery in the current year remains, to some extent, uncertain. 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 Affairs (BEA).