Friday, October 28, 2011

US "muddling through" ok

Third quarter US GDP came in at a seasonally adjusted annual rate (saar) of 2.5%. This was bang on market expectations, but stronger than we were expecting.

The surprise for us came in the strength in consumption which posted a saar of 2.4%. We had expected something closer to 2%. Even that would have been a significant improvement on the 0.7% recorded in Q2.

This result doesn’t change our view of a generally tough environment for consumption. Indeed the 1.7% decline in real disposable incomes over the quarter means the growth in household expenditure over the quarter was “funded” via a decline in the savings rate to 4.1%, a percentage point lower than Q2. The combination of weak employment and income growth, soft consumer confidence, and a housing market that is still struggling to form a base is not a recipe for a continuation of consumption growth at this level into Q4.

On the bright side the sectors we have looked to lead the recovery in the US chimed in well over the quarter. Exports were up a saar of 4.0% and business investment (equipment and software) was up 17.4%. We like that.

Stocks (inventory accumulation) subtracted 1.1% over the quarter. That tells us that firms responded quite rapidly to the increase in uncertainty over the quarter and the subsequent slowdown in growth. That bodes well for stronger production ahead.

This result doesn’t change our view of a fragile debt constrained recovery in the US. But it does support our view that, rather than a return to recession, the US will continue to “muddle through”. Indeed we are still happy with our Q4 GDP pick of a saar increase of 1.5%.