US Economy in April 2015

The moderation of the US economy was highlighted already some weeks ago, when 4Q GDP numbers pointed at some slow-down. This has now been confirmed with the final number 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 the 3Q. This decelerating trend in the US economy has continued in recent months and growth in the 1Q15 is now expected to be only around 1%, which – if it materializes – would impact the 2015 growth estimate. Labour market data, retail sales and industrial production all weakened in recent months. This may also have an effect on the decision of the Federal Reserve Board (Fed) to consider a potential interest rate rise.

Some factors which have caused this negative trend might have been temporary. Cold weather and the quick appreciation of the US dollar were important factors in the recent slow-down of the 1Q. Therefore, a rebound of some delayed economic activity is expected to materialise during the rest of the year. This will also depend, to some extent, on the future trend of the US dollar and, even more so, on the Fed’s monetary policy. While it is expected that any increase in the interest rate will only be made after careful consideration of the performance of the domestic economy 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.

Private household consumption is healthy and remains the most important driving force for US economic growth. Although it depends on the further development of the earnings situation, and other labour market and 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 4.4% 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 improved significantly over the past several months and latest data confirms this trend. But some weakening has become apparent. The unemployment rate remained at 5.5% in March, but total non-farm payrolls disappointed, growing by only 126,000 in March, after a downwardly revised number of 264,000 in February. On the positive side, the share of long-term unemployed improved to 29.8% from 31.1% in February, the lowest level since June 2009.

The housing market continues to recover, while the pace of the recovery was slowing in the past months. Monthly average house prices rose more than 5% in the latest available three months (November to January). Prices increased again by 5.1% y-o-y in January, as reported by the Federal Housing Finance Agency. Existing home sales have also continued improving, rising by 4.7% y-o-y in February after reaching 3.2% y-o-y in January and 4.3% y-o-y in December.

Consumer confidence remained at a high level of 101.3 in March after 98.8 in February and only slightly lower than the 103.8 seen in January, based on the index provided by the Conference Board. A sign of deceleration, however, was noted in the purchasing manager’s index (PMI) for the manufacturing sector, as provided by the Institute of Supply Management (ISM). It fell again slightly to 51.5 in March, after reaching 52.9 in February. The ISM for the services sector, which contributes more than 70% to the economy, remained almost unchanged at 56.5 in March, which was only 0.4 points lower than in February.

The GDP growth forecast for 2015 remains unchanged at 2.9%. However, the latest signals from output and lead indicators suggest that the depth of the recovery in the current year remains, to some extent, uncertain. 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). Uncertainties remain and economic activity will need close monitoring, given the recent slow-down. Low first quarter output numbers might also force a downward revision of this year’s growth figure in the near future.