Tuesday, February 25, 2014

It's not just the weather

We’ve hit a soft patch in US activity data, particularly in the manufacturing and the housing & construction sectors.  This is having a flow-on effect into the labour markets with recent payrolls data soft too.  Recent bad weather has been copping most of the blame for the weakness in the data which appears reasonable (although the weather in San Francisco last week was outstandingly good!!!).  To that extent, once the weather improves, a bounce-back in activity can reasonably be expected.

We’re also keeping an eye on inventories.  You may recall I was surprised by the continued strength of inventory accumulation into the end of last year.  That, alongside a surprisingly large contribution from net exports in the fourth quarter, saw GDP come in higher than expected in the second half of last year.  Indeed growth in real final sales (the bit that really matters) was softer than GDP in every quarter of 2013.  For 2013 as a whole annual average growth in real final sales was 1.7% while GDP grew 1.9%.  Both numbers are likely to be revised down at the end of the week when we get the second estimate of Q4 2013 GDP, but the story will remain largely the same.

We think it’s inventory payback time.   We attribute some of the recent weakness in manufacturing data to a reversal in the positive contribution from inventories over 2013.  That means that while we expect some bounce in the activity data when the weather gets better, don’t expect a full reversal.  We think March 2014 quarter GDP growth will be close to 1.0% (seasonally adjusted annual rate) with a result around 2.0% in the June quarter as the drag from inventories continues into the middle of the year.
We expect growth to be stronger in the second half of the year.  For 2014 as a whole we are forecasting GDP growth of 2.8% with real final sales coming in at 3.1%.  So we are going into a period in which real final sales will be stronger than total GDP.  From a monetary policy perspective we think the US Federal Reserve will look through the soft patch in growth, focus on the improving underlying fundamentals and continue to wind its asset purchase program down.