BMI View : In light of the fiscal agreement reached at the beginning of 2013, we have revised up our US real GDP growth forecast to 2.3% from 2.1% for the year. Residential construction will continue to be a bright spot in the economy, while there are upside risks to corporate investment later in 2013 now that there is more clarity over the fiscal debate in Washington.
Our 2012 US real GDP growth estimate has been revised up to 2.2% from the 2.0% forecast we set out at the beginning of the year. This is mainly due to the stronger-than-expected re al GDP growth figure for Q312 (3.1 % q-o-q annualised , up from the originally recorded 2.0% ), which in turn can be attributed to an unexpected surge in business inventories and national defence spending. But o ur general outlook for a slow and erratic growth path for the US economy remains in place. The biggest near-term economic issue -- the tax hikes that were set to kick in on January 1 , 2013 as part of the fiscal cliff -- has been resolved, though there will continue to be uncertainty ahead of the debt ceiling negotiations and the sequester spending cuts due to come into effect in March.
|US - Real GDP Growth And Percentage Point Contribution By Expenditure Category|
We have detailed the outcome of the fiscal cliff negotiations elsewhere (see 'Fiscal Cliff Deal: Long-Term Issues Remain Unresolved', 7 January 2013 on our online service), but the upshot for economic activity is that we have revised up our US real GDP growth forecast to 2.3% from 2.1% for 2013. While this partly reflects slightly stronger incoming data in Q412 increasing the base effect for 2013, the tax matters in the fiscal cliff were resolved more swiftly than we had expected, with the final tax hikes amounting only to the expected payroll tax cut expiry (costing about US$115bn to US workers in 2013, around 0.75% of GDP) and an increase in taxes for wealthier households (amounting to around US$60bn). The extension of unemployment insurance ($30bn) is a modest plus, but the total tightening we estimate including the sequester is around US$250bn in 2013, or around 1.5% of GDP. Taking into account the multiplier effect of the various categories of tightening, the overall drag on growth in 2013 will be around 1.0pp, toward the low end of our expectations. On the upside, there should now be a bit more confidence from both businesses and consumers that had been concerned over the cliff, though some sectors (the defence industry for example) will be concerned about the automatic sequester spending cuts that are to be negotiated ahead of March. Our core view is that Congress and the White House will resolve the debt limit issue and avoid default (although perhaps only at the last minute), while the US$110bn in sequester spending cuts will be reduced by at least half or deferred altogether.
|Back To Normal...In Nominal Terms|
|US - Nominal GDP Growth And Deflator|
One overlooked aspect of the economic trajectory of the past few quarters is that while real GDP growth has been poor, nominal GDP growth is, quietly, racing ahead - and in Q312 grew by the most since the recession. The implicit GDP deflator is back into 'healthy' pre-crisis territory at around 2.5%. The Fed's policy is, arguably, helping, at least insofar as avoiding outright deflation. It looked as recently as 2009, for example, that the US deflator could drop to Japan post-1990 levels. This is essential from a deleveraging perspective. If interest rates remain as anchored as they have been, while nominal growth remains above 5.0%, deleveraging becomes a much easier process. Normally, long-term interest rates match the nominal growth rate of the economy over the long run (as has been the case since 1961 in the US, with 10-year government bond yields of 6.6% and nominal growth within 5bps of that). However, with the Fed keeping a lid on interest rates, this disconnect could persist for a long period of time. As of Q212, deleveraging in terms of percentage of GDP had largely stalled for the non-financial sectors of the economy, but we believe that the decline will resume going into 2013.
GDP By Expenditure Breakdown
Private Consumption: We have lowered our real private consumption estimates for 2012 by 0.2pp and 2013 by 0.1pp in each year, to 1.9% and 2.2% respectively. Consumption growth remains weak, but admittedly, the erratic incoming data make it difficult to get a good sense of the underlying dynamics. Real personal consumption expenditures (PCE) contracted by -0.18% m-o-m in October, which was the worst outturn since late 2009, but this was followed by a post-crisis high of 0.58% m-o-m in November. And likewise, real disposable income growth contracted on a 3-month annualised basis in August, September and October, but picked up strongly in November.
|Erratic Trajectory, But Holding Up|
|US - Real Personal Consumption Expenditures, % chg monthly and quarterly|
The fiscal cliff resolution complicates the consumer picture further . U ncertainty over the fiscal cliff - which may have held back purchases in 2012 - will abate, but the overall impact will almost certainly be negative, given the increase in tax rates . The biggest hit will come from the payroll tax increase, which will take a US$1,000 chunk out of annual income for workers making US$50,000 a year. Overall, we estimate that it will reduce year-on-year disposable income growth per capita in 2013 by around 1pp; so in other words, in January, disposable income per capita would have risen by 2.6% given historical trends, but will only rise 1.6% because of the higher payroll tax rate. This will leave real private consumption growing in the low 2.0% range, which is below the long-term historic trend, but around post-crisis averages.
|Payroll Tax Increase Will Bite Into Disposable Income|
|US - Personal Disposable Income Per Capita, % chg y-o-y|
Fixed Investment: We are p rojecting real fixed investment growth of 7.4% in 2013, an improvement from 5.2% in 2012. Residential investment will continue to be an economic bright spot, and we will have a better sense of how badly the fiscal cliff uncertainty has affected business investment after the December data are released. That said, now that the fiscal cliff issues have been resolved, strong corporate balance sheets will provide a platform for capital expenditures in the latter three quarters of 2013, barring a collapse in demand. At this stage though, the deteriorating figures in Q312 (a 0.23pp drag on headline GDP, the first decline since Q111) from non residential investment do not bode well. The Institute for Supply Management ( ISM ) manufacturing survey's new orders index implies only modest growth in equipment and software investment going into 2013 , following the contraction in Q312 . The ISM and durable goods orders show the same thing: poor Q412, but a rebound expected in 2013.
|Business Investment Should Recover After A Lull|
|US - Real Business Investment Growth And Surveys|
The recovery in residential construction, meanwhile, continues to gather pace. The chart below shows NAHB homebuilders' sentiment index lagged by six months, showing that they are a good leading indicator for housing starts. While we do not expect construction to double in 2013 -- as this relationship suggests - we do expect another very strong year of growth for the residential sector of 9.0% in real terms, following on from 13.0% in 2012. This should bring the sector's proportion of GDP to above 3.0% for the first time since 2008, and offer a sustained lift to the economy as a whole.
|Sentiment Suggests A Big Rebound In Residential Construction|
|US - Housing Starts And NAHB Homebuilder Sentiment (Lagged)|
Net Exports: We estimate that net exports made zero contribution to real GDP in 2012, and forecast a negative contribution in 2013 (0.1pp). The external climate has not been hospitable, with demand from Europe in particular weakening over the past couple of quarters. Judging from incoming survey data, we believe that export growth is likely to contract in Q412 (and we have revised down our forecasts accordingly). For example, the spread between manufacturing purchasing managers reporting higher export orders and lower export orders has shifted decisively toward 'lower' since June, which on every previous occasion in the past 20 years has coincided with a contraction in exports. However, the latest leading indicators have rebounded, suggesting that trade will pick up in Q212 after a weak couple of quarters. Much will depend on Europe, where a significant downturn would severely damage US export prospects.
|Survey Says...External Sector Is Weak|
|US - ISM New Export Orders (Balance Of Higher Minus Lower), And Export Growth|
Government Consumption: We are forecasting a third consecutive year of contraction in government consumption, with -0.1% real growth translating into a flat contribution to GDP overall. We expect this to improve only modestly in 2014, with a 0.1pp contribution. Defence spending made an unusually high 0.6pp contribution in Q3, and that will reverse in the coming quarters. The result of the sequester negotiations will be essential, as half of the planned spending cuts are to defence spending. Still, the drag from state & local government consumption and investment is over, which is good news. Beginning in Q409, state and local governments had subtracted from overall GDP, but with the majority of cuts already undertaken and tax revenue picking up alongside the general recovery, state and local governments posted a small but significant 0.04pp contribution to GDP in Q312. We expect this moderate contribution to continue.
|State Spending Has Stabilised, But Defence Spending Will Revert|
|US - Government Contribution to Real GDP Growth (pp)|
Risks To Outlook
The most imminent risk to economic expansion is the double threat of the debt ceiling debate and the sequester spending cuts due to hit in March. While we expect an amenable resolution to both issues, with the debt ceiling ultimately being raised after some brinksmanship, and at least half of the spending cuts to be deferred or cancelled altogether, political paralysis could result in a severe drop in private sector confidence. On the upside, there are several potential catalysts for stronger growth. Private sector credit growth is improving amid low short-term interest rates; the residential construction sector could rebound more quickly than we expect ; corporate balance sheets are very strong, supporting potential investment expansion as 2013 unfolds.
|Notes: e BMI estimates. f BMI forecasts. Sources: 1 BEA/BMI.|
|Real GDP growth, % change y-o-y 1||-3.5||3.0||1.7||2.2||e||2.3||f||2.5||f||2.5||f||2.4||f||2.4||f|
|Private final consumption, real growth % y-o-y 1||-1.9||2.0||2.2||1.9||e||2.2||f||2.3||f||2.2||f||2.0||f||2.0||f|
|Government final consumption, real growth % y-o-y 1||1.7||0.7||-2.1||-0.8||e||-0.1||f||0.7||f||0.5||f||0.5||f||0.5||f|
|Fixed capital formation, real growth % y-o-y 1||-19.6||2.6||6.8||5.2||e||7.4||f||5.7||f||5.3||f||5.3||f||5.3||f|
|Exports of goods and services, real growth % y-o-y 1||-9.4||11.3||6.7||4.0||e||4.9||f||5.8||f||5.1||f||5.0||f||5.0||f|
|Imports of goods and services, real growth % y-o-y 1||-13.6||12.5||4.9||3.0||e||4.6||f||5.0||f||4.2||f||4.0||f||4.0||f|
|Net exports of goods & services, real growth % y-o-y 1||-27.4||17.6||-2.0||-1.3||e||3.2||f||1.3||f||-0.1||f||-1.0||f||-1.4||f|