At the time of the release of US fourth quarter GDP, we warned the recovery in consumption was unlikely to be sustained into 2011. In the absence of anything remotely like strong income or jobs growth, the boost to consumption in Q4 came from a reduction in the personal savings rate. The saving rate dropped from an average of 5.9% in Q3 to 5.4% in Q4. While 5.4% was still relatively high, it was too early for households to pull back on the deleveraging process, which we expect to play out for a few more years yet.
We put the stronger Q4 consumption spending down to pre-Christmas deleveraging fatigue – i.e. a bit of an opening of the wallets after a tough year. Into the New Year, retail sales rose only 0.2% in the January month, at the bottom end of the forecast range and median forecast of 0.4%. US analysts are putting the weaker than expected out-turn down to storms and higher petrol and food (commodity) prices. While that is undoubtedly the case to some extent, we think it’s also due to the fact that households are still primarily focussed on balance sheet repair.
Interestingly, incomes were up 1% in the month. Disposable incomes were up 0.7%. This reflects tax changes including the payroll tax cut. Without this, incomes would have been up only 0.1% in the month. And the personal saving rate has gone back up to 5.8%, from 5.4% in December. All good.
The good news is that the manufacturing sector continues to improve. I don’t normally watch the regional ISM surveys, but last night’s ISM-Chicago Inc business barometer deserves special mention. The index rose to 71.2 in February. That’s the highest level since July 1988 too. Remember, this recovery needs to productive sector led and export oriented – so this is all good too.
In short, everything’s back to new-normal. While that means the US recovery will remain subdued by traditional standards, there is good repair work going on behind the scenes which bodes well for growth further down the track.