Sunday, October 28, 2012

Good US GDP result, headwinds remain

US economic growth picked up in the third quarter of the year, posting a seasonally adjusted annual rate (saar) of 2.0%.  That’s slightly higher than market consensus and a stronger result than the 1.3% increase reported in the second quarter.  However, headwinds remain, not the least of which is the looming fiscal cliff.
 As indicated by recent retail sales and other consumer-oriented data, the key contributor to the third quarter result was higher consumer spending.  As I have commented on previously, higher consumer confidence on the back the recovering housing market and recent sharemarket strength.  That saw consumer spending rise at a 2.0% saar in the quarter, largely on the back of stronger durable goods spending.

However, the factors we continue to rely on to be the key driving forces of the American recovery did not fare so well.  Exports fell at a saar of 1.6% while business fixed investment grew at a paltry 1.5% with equipment and software spending flat.  The slowdown in global growth and concerns over the fiscal cliff are weighing on both sectors.

Looking ahead it remains to be seen whether this pace of consumer spending is maintained in the end of the year.  While we believe we are the early stages of a mutually reinforcing cycle of a recovering housing market, higher consumer confidence and more stable consumer spending, fiscal cliff uncertainties and continued deleveraging will weigh on consumer spending over the short and long term respectively.

Business investment is likely to remain soft in the period ahead, largely due to fiscal cliff concerns.  Core capital goods orders have fallen sharply recently so a contraction in business investment appears on the cards for the current quarter.  However, we believe that once the fiscal cloud has lifted, we would expect business investment to pick up again.  The good news on the export front are the signs of stabilisation of the recent slowdown in global growth, supporting our view of a modest pick-up in global growth next year.  

For now the key uncertainty is the fiscal cliff.  As discussed before, we think post-election the politicians will kick the can down the road.  Unfortunately that means the uncertainty goes on for longer; businesses who are delaying hiring and investment decisions because of fiscal uncertainty will have reason to delay further.  Delaying decisions of key fiscal policies means the debt ceiling will need to be lifted again, probably in March.  That risks another acrimonious political debate as we saw last year.  That will depend on the strength of mandate of the new (or renewed) President.  Will he have the House and the Senate?  I think that may be wishful thinking.  More on the fiscal cliff next week.