Sunday, January 29, 2012

US GDP: the strong and weak of it...

The US economy posted its strongest quarterly growth of the 2011 year in Q4, contrary to most of the world’s major economies which generally lost momentum as the year progressed. The result printed at a seasonally adjusted annual rate (saar) of 2.8%, up from 1.8% in Q3 but weaker than the average 3.0% market expectation. Annual growth came in at 1.7% for the 2011 calendar year.

Consumption growth came in weaker than expected at 2.0% (saar) for the quarter. This was the primary reason for the weaker than expected overall GDP result. Even then, weak income growth meant the consumption growth was partly funded out of a reduced savings rate, which dropped from 3.9% in Q3 to 3.7% in Q4, the lowest savings rate since Q4 2007.

While it was the strongest overall result of the year, this was largely due to a significant build-up of inventories, which added 2.0 percentage points to the quarterly result. Excluding this component, GDP was only up 0.8%. That’s soft.

Other components were as expected. Residential construction increased 10.9% (saar). We put that down to a “bounce off the bottom” and good weather over the quarter. We don’t expect housing to be a persistent driving force of US growth anytime soon. The Government was a detractor from growth over the quarter, posting a contraction of 4.6% (saar), mostly from a decline in defense spending. We expect the Government sector to be a detractor from growth for the foreseeable future as Federal, State and local government all move to more sustainable budgets.

Here’s the good news: the two sectors we have looked to drive growth since the recovery started, exports and business investment, put in further solid performances. On a saar basis, exports were up 4.7% in the quarter while business equipment and software posted a 5.2% gain. That’s a great export performance given weaker global growth towards the end of the year.

There are some important messages in this GDP result. Firstly, it was not as strong as a cursory glance at the headline number would suggest. We do not expect the improving quarterly trajectory of 2011 to persist into 2012. We are still happy with our 2012 calendar year forecast of 2.0% for 2012.

Secondly, the US economy is in the early stages in an important rebalancing. Over the foreseeable future we expect consumption to remain soft reflecting slow jobs growth and continued household deleveraging, albeit at a slower pace. At the same time we expect the government sector to contract and exports and business investment remain the strongest areas of growth. The problem for the US economy is that exports are only 10% of GDP: we expect that ratio to rise overtime, just as we expect manufacturing to increase its share of sectoral growth. Time to dust off the rust belt!

More generally, the major challenge for the US economy in building higher sustainable growth is to produce goods the world’s consumers (e.g. China and India) want to buy at globally competitive wages. This is a structural recession requiring a structural recovery.