Friday, June 28, 2013

US GDP revised down, but consumer spending bounces back

This week’s downward revision in US Q1 GDP was a surprise.  However, rather than a new surprise, it’s probably best described as a reversal of an old surprise.  Earlier in the year we had been surprised by the resilience of consumer spending in the face of higher taxes; this week’s revision in the data was mostly a reduction in the earlier estimate in consumption expenditure.  In that respect, the data now actually makes a bit more sense.

While that’s history, knocking Q1 GDP growth down from an annualised 2.4% to 1.8% does impact my US GDP forecast for the year.  Leaving my quarterly track for the rest of the year unchanged I’m now picking 1.9% annual average growth for calendar 2013, a tad below our estimate of trend growth.

The growth track for the rest of the year continues to have the current June quarter as the weakest quarter in 2013.  However, I’m not expecting a sharp slowdown from the (new) Q1 result.  In that respect it was pleasing to see May consumer spending post a +0.3% rise following the -0.3% decline in April.  That has our expectation of annualised growth of +2.0% for consumption and +1.5% for GDP in Q2 alive and well.

Personal income growth was also stronger in May (+0.5% m/m) than it was in April (+0.1% m/m).  Wages and salaries growth was +0.3% m/m reflecting continued solid (though unspectacular) jobs growth.  Consumer spending has also been helped by recent low inflation and the resultant boost to real disposable incomes which were up +0.4% in May.  The Personal Consumption Expenditure (PCE) deflator rose +0.1% over the month with the annual rate coming in at +1.0%.  The core PCE deflator, the Fed’s preferred inflation measure is running at +1.1% y/y.
We expect consumption growth to move higher in the second half of the year on the back of higher employment and income growth, as well as the continued improvement in the housing market.  This is the key contributor to our expected pickup in GDP growth in the second half of the year.  The key risk to that view is sequestration.  Our assumption is that much of the impact is already reflected in soft federal spending results in Q4 last year and Q1 this year, although we think there is still more downside to come through in the payrolls numbers.  Watch this space - June payrolls data will be interesting in that regard.
Markets are now focussed firmly on the point at which the Fed starts to reduce the pace of the asset purchase program, with economists seemingly split between September and December this year.  I’m still holding to the line that December is the earliest we would expect the Fed to start tapering QE.  I think there will still be too much uncertainty around the strength and sustainability of pickup in GDP growth, the outlook for jobs growth and, more importantly, the necessary turnaround in continued soft inflation readings for the Fed to act any earlier than that.