Q412 GDP Contraction A Small Bump In Recovery
BMI View: While Q412 saw US real GDP contract at an annualized rate of 0.1%, well below market expectations, we maintain our positive outlook for the US economy and forecast real GDP growth to accelerate to 2.3% in 2013 from 2.2% in 2012 . We expect to see moderation in the factors that led to the contraction and believe that core components of the US economy - including private consumption and residential construction growth - continue to trend in the right direction.
US real GDP contracted at an annualized rate of 0.1% in Q412, suggesting that 2012 GDP growth came in around our forecast of 2.2% , up from 1.8% in 2011. While the fourth quarter number came in well below Bloomberg consensus estimates for 1.1% growth, we maintain that the US economy remains in a slow , but steady , recovery. We forecast real GDP growth of 2.3% in 2013, but note that upward revisions of Q412 GDP growth (second and final readings come in February and March, respectively) could lead us to revise down 2013 growth due to base effects.
|GDP Underperforms Expectations|
|US - Real GDP Growth & Expectations|
Despite the first quarterly contraction in real GDP growth since Q209, we continue to see positive signs from real private consumption and residential construction growth, in line with our view that the US economy continues to improve . Indeed, consumption contributed 1.5 percentage points (pp) to real GDP and grew at an annualized 2.2% in Q412, up from 1.6% and 1.5% in the third and second quarters of last year, respectively. Residential construction grew at an annualized rate of 15.3% in Q412, maintaining a broad uptrend.
|Consumption And Housing Trends Are Positive|
|US - Annualized Real Private Consumption & Residential Construction Growth, %|
That said, a confluence of several factors offset the positive contribution of private consumption to real GDP growth, but we expect these factors to moderate , dragging less on the economy in 2013. Goods exports knocked 0.8pp off real GDP growth last quarter due in large part to weakness in the eurozone economy , but we expect stronger growth in Europe relative to 2012 will be supportive of US exports, which will drag less on the US economy over the coming quarters. Indeed, ISM new export orders data showed improvement in December, suggesting that exports may soon rebound.
|A Confluence Of Drags On Growth|
|US - Select Contributors To Real GDP Growth, pp|
Change in inventories also weighed heavily on headline growth, but we believe this was largely attributable to heightened uncertainty about policy direction , as the U S presidential contest narrowed and the fiscal cliff loomed. With the relatively benign resolution of the fiscal cliff in early January - large spending cuts were averted and tax increases were modest - inventory growth may weigh less on growth , especially if export demand accelerates and consumption stays strong .
Finally, defence spending knocked 1.3pp off growth last quarter, but here , too , we see less of a drag going forward. While we acknowledge the potential for defence spending to trend lower over the coming years , as the US extricates itself from war in Afghanistan and wrestles w ith long-term deficit reduction, some of the Q412 decline could possibly be attributed to base effects of increased Q312 Pentagon spending in anticipation of a potential sequester that would have slashed defence budgets.
Risks To Outlook
The resolution of the fiscal cliff did not eliminate political risk from the horizon, as some federal legislators are threatening a government shut-down in March unless budget cuts are made. Similarly, the government must raise the debt ceiling in May, another political flashpoint that could upset markets and derail growth if handled poorly. F urther economic deterioration in Europe would result in continued poor performance by US exports, weighing on GDP growth throughout 2013.