BMI View: We have downgraded our US real GDP growth forecast for 2013 to 2.1% from 2.3%, due mainly to base effects from late 2012, and the decision to maintain the 'sequester' cuts to federal spending. Our core view on the US economy is that the recovery is becoming increasingly entrenched, and that by 2014 many of the headwinds to growth will be dissipating.
The near-term US economic outlook will be shaped in large part by fiscal retrenchment, above and beyond the 'fiscal cliff' deal reached in January 2013 that we wrote about in our previous economic activity update. The implementation of the 'sequester' spending cuts in March 2013 will amount to US$1.2trn over a decade, and more immediately, US$85bn in the 2013 fiscal year. BMI's core forecast had already pencilled in about US$55bn in sequester reductions in 2013 (half of the US$110bn originally scheduled, predicated upon a compromise to reduce the sequester impact - see our online service, March 6, ' Sequester Impact To Be Relatively Modest '). The final sequester figure is about US$30bn more than that assumption, which is about a 0.2-0.3% of GDP difference to our baseline. Added to poor base effects from weak growth in Q412 (of just 0.4% q-o-q annualised), we have revised down our real growth forecast for 2013 to 2.1% from 2.3%. Nonetheless, our core view remains the same, which is that US economic activity should pick up as the year progresses, led by business and residential investment. Our 2014 growth forecast of 2.7% represents a major bounce from 2013, and is an upgrade from our previous projection of 2.5%.
|Inventories (% of GDP)||0.3||0.4||0.3||0.4||0.4|
The spending cuts come at a bad, but not necessarily a disastrous time. The tax increases that came into effect at the beginning of 2013 will take their toll, but we still believe that the economy is due to pick up steam in the second half of the year. That outlook is somewhat more restrained now that the sequester is in place, but an improvement in the private sector should be more than enough to fend off downside risks to growth from the sequester. The spending reductions are also unlikely to come all at once, but it is unclear how they will be distributed over the course of the rest of the fiscal year, meaning the growth impact on the economy as a whole is difficult to measure.
|A Rising Tide|
|US - Real GDP Growth|
For now, the jury is still out, but we think that on balance, the data indicate an increasingly firm recovery, particularly within the private sector. Data in the opening months of 2013 have been generally positive, with the first really negative blip coming in the first week of April, when nonfarm payroll jobs were estimated to have grown by only 88,000 in March, well below the average of 150,000 in the previous three months. The unemployment rate decreased to 7.6% from 7.7% in February, but only because of a sharp decline in the labour force participation rate to the lowest level since 1979.
|Employment Data Points To Flattening Growth|
|US - Nonfarm Payrolls And Real GDP Growth|
The ISM manufacturing purchasing managers' index (PMI) indicated expansion in March at 51.3 , down from 54.2% in February. Taken together with the nonfarm payroll figures, and a tickup in initial jobless claims, it is possible that we are seeing the first signs of the sequester spending cuts taking hold.
Then again, the economy's recovery appears to be increasingly cemented. For one thing, private credit markets -- which collapsed in 2008 -- have been healing slowly, and we have begun to see a consistent rise in year-on-year credit growth to households and businesses.
|Credit Market Continues To Heal|
|US - Credit Market Debt Outstanding By Sector, % chg y-o-y|
For another thing, we maintain our upbeat outlook on major cyclical sectors of the economy such as residential investment, and increasingly believe that business investment should pick up as well. Our biggest reason in the earliest stages of the recovery (2009-10) for refuting the likelihood of a double-dip recession was that many key components of GDP were at or near such low levels that it was difficult to see how they would make significant negative contributions in future quarters. The accompanying chart shows the aggregate level of three key cyclical elements of GDP - equipment & software investment, durable goods consumption, and residential construction -- as a percentage of GDP. Growth in these categories of GDP have typically helped lead the US out of recession, and have done so since 2009, rising from 16% of GDP to 18% as of Q412, around the lowest levels in the post-World War II period. The prospect of a continued rebound in these cyclical areas underpins our thesis for continued growth in residential construction and business investment as 2013 and 2014 proceed.
|Plenty of Room For Recovery|
|US - Cyclical Components Of GDP, % Of GDP|
GDP By Expenditure
Private Consumption: Despite the changes in our headline growth forecasts, our outlook for private consumption is basically unaltered. We forecast the US consumer will continue to slowly strengthen in 2013 and 2014 as improvements in the labour market, as well as wage, income and wealth dynamics, come together to support the consumer. Our real consumption growth forecast for 2013 remains 2.2%, while for 2014 it has ticked up slightly to 2.5 % from 2.3 %.
|Consumption Holding Up Despite Headwinds|
|US - Private Consumption, % chg annualised, q-o-q and m-o-m|
Our forecast for improving, yet below-trend consumption, is predicated upon several factors. The increase in payroll tax beginning in 2013, which will take a US$1,000 chunk out of annual income for workers making the median income of around US$50,000 annually, will be a headwind. However, recent data shows that despite this decline, real disposable income has been rising slowly in year-on-year terms, and given the weak inflation picture in the US, we see potential for additional strength going forward. Household balance sheets continue to recover following a steep contraction during the recession. While the total net worth of households and non-profit organisations remains below the pre-crisis peak of 2007, it has been growing very strongly in recent quarters. Furthermore, with interest rates set to remain low for the next few years, consumer credit growth could pick up further as the cost of borrowing remains low. Given the improved economic outlook, consumers will be more willing and able to take on credit, while banks, with improved cash buffers and increased stability, will be more willing to lend. Already, monthly consumption figures to February suggest that the Q113 figure could come in above 2.0% q-o-q annualised, which would be an improvement from 1.8% in Q412.
Fixed Investment: Owing largely to weak base effects from Q412, we have downgraded our 2013 real fixed investment growth projection to 6.8% from 8.1%. However, due to our belief that residential construction will remain strong and business investment will pick up following a period of major policy uncertainty, we have raised our 2014 investment forecast to 7.0%, from 5.7%. Core durable goods orders to March 2013 imply increasingly strong equipment and software investment going into 2013, following the contraction in Q312. We believe that with corporate profits around record levels, and with a significant amount of uncertainty now in the past following the fiscal cliff deal at the turn of the year, businesses will have an increasing propensity to invest.
|Business Investment Likely To Pick Up|
|US - Core Durable Goods Orders And Real Business Investment|
The US residential construction sector returned to growth in 2012, with a 15.6% increase in spending driving 11% growth in overall construction spending. Housing starts and building permits have both hit multi-year highs, with February 201 3 housing starts coming in at 917,000, the highest rate since mid-2008. Despite this, the sector remains significantly below trend , implying further upside over the medium term. With new order bookings from US homebuilders continuing to post strong growth, residential construction should continue to support growth through 2013.
Net Exports: We have revised down our 2013 growth forecasts for exports and imports of goods and services, in large part due to base effects from 2012. Our 2013 export growth forecast is 3.5% (down from 5.8% previously), and our import growth forecast is now 2.8% (down from 4.6% previously). That said, the changes mostly offset each other, and we now forecast net exports will make no contribution to real GDP growth, up slightly from our previous forecast for net exports to subtract 0.1pp from real growth. However, these forecast revisions somewhat obscure the trends we see developing in the US economy. Our Shipping Team highlights the increased throughput at the Port of Los Angeles in the first months of the year as evidence that both exports and imports are accelerating relative to last year. We expect these dynamics to persist throughout 2013 and into 2014, as a strengthening consumer boosts imports and the external environment gradually improves.
|Trade Growth Is Strengthening|
|Port of Los Angeles Container Throughput, % chg y-o-y (Jan-Feb 2012 and Jan-Feb 2013)|
Government Consumption: We have revised down our 2013 government consumption growth forecast to -1.5% from -0.1% previously, owing almost entirely to the implementation of the sequester spending cuts in March . It is entirely possible that the Republicans and Democrats come up with a compromise to push back some of the cuts , perhaps by rearranging some of them to ensure that some areas of spending are fully funded, while keeping the over all reduction at current levels . Crucially, a government shutdown - which could have resulted from impasse over the 'continuing resolution' - has been averted by an agreement reached in March 2013 , meaning that from a federal standpoint at least, this year is likely to represent the trough for government consumption. From a state and local spending standpoint, we expect the worst is over, and that the consistent drag on US growth from this category should flatten out as 2013 proceeds.
|Notes: e BMI estimates. f BMI forecasts. Sources: 1 BEA/BMI.|
|Real GDP growth, % change y-o-y 1||-3.1||2.4||1.8||2.1||2.2||2.7||2.6||2.4||2.4|
|Private final consumption, real growth % y-o-y 1||-1.9||1.8||2.5||1.9||2.2||2.5||2.2||2.0||2.0|
|Government final consumption, real growth % y-o-y 1||3.7||0.6||-3.1||-0.8||-1.5||0.0||0.7||0.5||0.5|
|Fixed capital formation, real growth % y-o-y 1||-19.0||-0.2||6.6||8.5||6.5||7.2||5.3||5.3||5.3|
|Exports of goods and services, real growth % y-o-y 1||-9.1||11.1||6.7||3.4||3.5||5.2||5.1||5.0||5.0|
|Imports of goods and services, real growth % y-o-y 1||-13.5||12.5||4.8||2.4||2.8||5.1||4.2||4.0||4.0|
|Net exports of goods & services, real growth % y-o-y 1||-28.2||18.2||-2.8||-1.8||-0.4||4.6||-0.1||-1.0||-1.3|