Global Economics Weekly Brief
US GDP Miss
All eyes were on America last week, and not just for Super bowl XLVII. There were two key data releases – one good, one bad.
The good news came from the labour market, where the US has added more than two million jobs over the past year. The bad news came from the GDP release, which showed the economy unexpectedly shrank in Q4. Even so, it wasn’t that bad. If there’s such a thing as a “good” contraction, this was it.
US GDP down but not out. On the face of it, the Q4 release for US GDP was a howler. Output fell by 0.1% (q/q, annualised), which was way below the +1¼% that markets had been expecting. But on closer inspection, the release wasn’t that bad. Most of the fall was down to a sharp decline in defence spending by the government – likely a one-off – and companies running down stocks. These offset higher household consumption, rising house building and stronger business investment. As the Fed said in its post-meeting statement, this reverse doesn’t herald another recession. But it’s a reminder of the fragility of most advanced economies.
Even if we have the sequester, the burden of USA government spending will still be about $2 trillion higher in 10 years.
Will bad news delay the sequester? Wednesday the government released the fourth quarter’s Gross Domestic Product, the output of goods and service produced by labor in the United States. That number decreased by .01 percent. It doesn’t sound like a big deal, decimal point next to a digit that small, but it reflects a shrinking economy instead of a growing one. And the main reason for the contraction: Government spending.
From the report: “Real federal government consumption expenditures and gross investment decreased 15.0 percent in the fourth quarter, in contrast to an increase of 9.5 percent in the third. National defense decreased 22.2 percent, in contrast to an increase of 12.9 percent. Nondefense increased 1.4 percent, compared with an increase of 3.0 percent. Real state and local government consumption expenditures and gross investment decreased 0.7 percent, in contrast to an increase of 0.3 percent.”
In other words, government is shrinking across the board. And this is before the sequester. Those numbers will decline even more after the sequester begins. Will they?
The USA has still major issues across many sectors. Plus, borrowing are $16 trillion and growing daily! When will it end?
GDP might have disappointed but job growth is sustained. The US economy created 157k jobs in January, not far below the 180k a month that was managed through 2012. This is encouraging, but the good news did not stop there. Revisions to the November and December data showed 127k more jobs were created than originally thought. And let’s not forget that the fiscal-cliff shenanigans will have caused some businesses to delay hiring decisions.
More encouraging news on US housing, but consumers still have the blues. House prices were 5.5% higher than a year ago, according to the Case-Shiller Index for 20 US cities over the three months to November. That’s now six months in a row that prices have increased y/y. Even so, it hasn’t boosted the feel-good factor, according to a leading survey of consumer confidence. The fiscal cliff weighed on sentiment in December, which fell for the third straight month, and is back to its level at the end of 2011. Most Americans are worse off because of the deal that pushed up payroll taxes.
Good news for global manufacturing. Manufacturers made a good start to 2013 in most countries, according to purchasing managers’ indices (PMI) for January. The US reading reached a nine-month high, adding to evidence that the surprising fall in Q4 GDP was an anomaly. Across in Asia, figures for China suggest a modest recovery remains on track. Japan's PMI rose to a four-month high but remained in contraction territory. Japan will be hoping that the recent change in monetary policy, which has helped drive down their currency, will boost output in the months ahead. But those changes could have consequences for the global economy far beyond a weaker yen.
UK manufacturing held back by falling export orders. Will sterling come to the rescue? The UK manufacturing PMI dropped from a 15-month high of 51.2 in December to 50.8 in January. Domestic demand increased but new export orders continued to decline. Manufacturers remain focused on cost reduction as market conditions remain tough, but a small increase in employment suggests there are pockets of optimism. That could be due to the recent fall in sterling, which has slipped to a 14-month low against the euro. One pound will get you 1.16 Euros at time of writing, which represents a 9% depreciation from last summer. The Eurozone crisis has cooled over recent months, helping to attract investors back towards the single currency, while Sterling has been hit by a run of poor data. The Eurozone is fighting back!
Mortgage approvals reach an 11-month high. There were 55.8k approvals in December – 6.1% higher than a year ago, but still only a little more than half the levels we saw at peak in 2006. Growth in actual lending was more muted, however, at just 0.6%y/y. This is consistent with trends in the housing market. Prices are flat in y/y terms, though a small rise in January will have brought some New Year cheer to homeowners (+0.5%m/m according to Nationwide). Very few first time buyers.
Corporate sector borrowing continues to decline. Last week, We reported that 2012 had been a record year for corporate bond issuance. However, bank borrowing continues to fall – balances in December were 6.2% lower than a year ago, and 28% lower than their 2008 peak. It’s tempting to think that the two trends are connected i.e. companies are issuing bonds and using the proceeds to pay down bank debt. That may have been true between 2009 and 2011, according to the Bank of England, but 2012 was a different story. There was an increase in the proportion of companies issuing bonds for other reasons (e.g. future business expansion) rather than repaying bank loans.
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US GDP Miss.