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29 October 2012
US Economic Update – US GDP, 2012 Q3
US GDP grew by 0.5% qoq (or 2.0% annualized) in the September quarter, stronger than in the previous quarter but still only modest. The strengthening in growth was due to consumption, housing investment and government spending picking up. Of concern, however, was a decline in business investment. The drought also detracted from growth. We expect that the drawn-out recovery will continue. While the fiscal cliff may cause some turbulence, if it is scaled back (as expected) growth will likely strengthen in 2013. We expect GDP will grow by 2.2% in 2012 (previously 2.1%) and 2.4% in 2013. It is likely that the Fed will announce additional asset purchases to start following the completion of Operation Twist at the end this year.
U.S. economy stronger in Q3, but growth still only modest
% quarterly ch. US GDP
-2.0 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12
Source: US Bureau of Economic Analysis
Consumption, housing and govt spending led the way The advance estimate of US GDP for the September quarter showed growth of 0.5% qoq (or 2.0% annualised). This represents some acceleration from the previous quarter, although it is still only a modest rate of growth. Growth was slightly above market (and our own) expectations largely due to a large rise in federal defence spending in the quarter. Possibly more enduring factors were a strengthening in consumption and in residential housing investment, offsetting worrying weakness in business investment as well as declines in net exports and, due to the drought, inventories. Consumption grew by 0.5% qoq, a little faster than the previous quarter’s pace of 0.4% qoq. This was due to a rebound in durables consumption after a fall in the June quarter, as well as the strongest growth in non-durables consumption in one-and-ahalf years. However, services consumption grew by only a lacklustre 0.2%. Unusually, a factor constraining consumption over the last two quarters has been a decline in health care services consumption (at least since the 1970s falls in two consecutive quarters have only occurred in recessions). Business fixed investment fell by 0.3% qoq, compared to growth of 0.9% qoq in the previous quarter and 4.4% qoq in the same quarter a year ago. The slowdown was in both non-residential structures (which fell 0.8% qoq) and equipment and software (which was flat). The decline in business investment was only the second quarterly decline since it started growing following the recession. The other time was the March 2011 quarter due to the impact of very poor weather on construction; this time it is a more generalised slowing. Moreover, partial indicators do not suggest any immediate relief ahead with September core capital goods orders again disappointing and capex intentions reported in the various Fed surveys generally marked down (and in the case of the Philadelphia Fed survey to a level only seen in or around a recession).
ppts Contributions to GDP
0.6 0.5 0.4 0.3 0.2 0.1 0.0 -0.1 -0.2
Source: US Bureau of Economic Analysis
Similar growth expected next quarter; but improvement in 2013
% ch. Year ended US GDP
5.0 3.8 2.5 1.3 0.0
Quarterly -1.3 -2.5 -3.8 -5.0 Sep-01
Source: US Bureau of Economic Analysis, NAB Group Economics
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29 October 2012
Q3 2012 GDP Details
QoQ (%) Consumption Fixed investment Structures Equip & software Residential Ch. in inventories Public Demand GNE Net exports Exports Imports GDP -0.4 -0.1 0.5 0.9 0.5 0.5 0.4 -1.1 0.0 3.4 QoQ cont. (ppts) 0.4 0.1 0.0 0.0 0.1 -0.1 0.2 0.5 -0.05 -0.1 0.0 0.5 2.3 2.6 2.3 -0.6 2.4 YoY (%) 2.0 6.4 4.9 4.7 13.8
indicators, while remaining slightly negative, stablised, suggesting that the bottom is not falling out of exports (or imports). We noted in our update report following the June quarter advance GDP estimates that following large declines in Federal defence expenditure historical experience suggests that there will be a bounce back in the next quarter or so. This time history did repeat itself, with federal defence spending rising 3.1% qoq, contributing to public demand achieving its strongest growth in three years. While defence got all the headlines, state and local government consumption and investment was essentially flat; this was also the best result in three years and confirms the improvement in partial indicators. While defence spending will likely correct in the next quarter or two, the trend at the state & local level is more important as it suggests the headwind from state/local government cutbacks continues to fade. On the inflation front, the PCE price index grew by 0.45% qoq, more than double the June quarter rate, due to the impact of higher gasoline prices (the surge in commodity prices because of the drought has not yet had much impact on retail food prices). Nevertheless, the annual growth rate was only 1.5%, similar to annual core PCE inflation of 1.6%. Inflation, therefore, continues to be below the Fed’s 2% long-term goal on both a core and headline basis.
Source: US Bureau of Economic Analysis
However, consistent with the modest nature of the recovery, while some sectors have been sluggish other sectors have grown strongly. Residential fixed investment continues to grow strongly, with growth of 3.4% qoq in the September quarter, and 14% over the last year. While this is a strong pace of growth, the level of activity remains exceptionally low. Therefore, there is a long way to go before residential investment returns to more normal levels. Despite rapid growth residential investment activity still very weak
Residential fixed investment
As expected the national accounts showed some pick-up in the growth rate of GDP but it remains modest and disappointingly slow. The weakness in business investment - possibly related to the “fiscal cliff” and election uncertainty – is likely to constrain growth in the near term but may lead to a lift from mid-2013 as delayed investments start-up. In the December quarter we expect growth to be similar to that of the September quarter. Consumption has some momentum with strong retail and auto sales growth in September. Moreover, consumer confidence has moved to a 5 year high (as measured by the University of Michigan/Thomson Reuters survey), including improvement in the important personal finances expectations, and petrol prices have fallen in the second half of October which will aid household budgets. Partial indicators also point to the strong growth in housing construction continuing. Moreover, inventories appear unlikely to detract from growth in the quarter. However, while there be some bounce back in business investment in nonresidential construction (in part due to some expiring depreciation provisions which may bring forward expenditure), partial indicators for equipment and software point to this category remaining weak. Nor is government consumption and investment likely to provide the same boost again. Beyond the current quarter the outlook is boosted by what appear to be some fading headwinds – state and local spending is no longer contracting and the pace of household balance sheet repair is showing signs of slowing (see our October U.S. update1 for discussion of the latter). A return to more normal growing conditions in 2013 will also see the farm sector add, rather than detract, from growth. In the housing sector, with the inventory of new homes still very low and sales rising, strong growth is likely for an extended period. Credit conditions (outside of housing) also continue to improve, and we expect the world economy to improve in 2013 as well which will support exports. The improvement in consumer confidence will help sustain consumption. While there are no signs that policy uncertainty (particularly the fiscal cliff) is materially affecting consumers, as the end of the year looms and speculation mounts about which cuts/tax increases may go through then consumers may start to hold back.
850 750 650 550 450 350 250
$ billion (2005 prices)
20 10 0 -10 -20 -30 -40
Source: Bureau of Economic Analysis
Inventory accumulation detracted 0.1 percentage points from growth in the quarter. This was entirely due to a reduction in farm inventories because of the drought, with non-farm inventory accumulation picking up pace in the quarter. While the drought will continue to weigh on farm inventories in the December quarter, its impact is likely be smaller, which would be a positive for GDP growth in the quarter. For only the second time in two years, net exports subtracted from quarterly growth. After holding up reasonably well in recent quarters in the face of the slowdown in the global economy and an appreciation of the $US, exports declined by 0.4%. The decline in exports was due to declining goods exports (the rate of growth for service exports actually increased) with only capital goods (ex autos) holding-up due to aircraft exports. The $US peaked in June and has fallen a little since then suggesting some of the pressure is coming off exporters (and import competing firms). Moreover, in September the ISM manufacturing trade
National Australia Bank Group Economics | 2
29 October 2012
It is too early to say how (and if) the large spending cuts/tax increases that make up the fiscal cliff will be addressed and which broad sectors of the economy may be most affected. There is increased speculation that the temporary payroll cuts may not be extended; however, at the same time there are newspaper reports that President Obama is considering income tax cuts if reelected2. Hopefully, once the election is out of the way some greater certainty about fiscal policy may start to emerge. But even if the fiscal cliff spending cuts/tax increases are scaled back so that the fiscal contraction in 2013 is similar to that of 2012 (our forecast), it could well be at the last minute (or even retrospectively in January). This may have economic repercussions through a loss of confidence and precautionary cutbacks in spending. While there is no evidence of fiscal cliff worries scaring consumers, the general consensus is that it, together with concerns over the world economy, is the major factor behind the business investment slowdown. Past studies have found business investment growth slows down in election years, so some of the slowdown may be due to a more general uncertainty which should start to abate once the election is over. The fiscal cliff appears to have magnified this general effect. However, the evidence is ambiguous. Employment growth is not turning down which would normally occur at this stage of the cycle if investment growth was declining. Moreover, the ISM manufacturing indicator also stabilised in September and with the fundamentals of high profits (albeit no longer growing) and improving credit conditions still in place, we expect the lull to be temporary. Employment growth holding up despite investment slowdown
Business investment and non-farm employment 30 yoy% non-farm empl (rhs) 20 4.0 yoy% 6.0
investment and the fiscal cliff, and with inflation below the Fed’s 2% goal, it appears increasing likely that the Fed will announce additional asset purchases (probably $45b a month as per Operation Twist) and open-ended as with QE3. In summary, we expect that the drawn-out recovery seen to-date will continue and while the fiscal cliff may cause some turbulence, if it is scaled back (as expected) growth will likely strengthen in 2013. Even so, only a slow reduction in the unemployment rate over time is in prospect. Overall, we expect GDP growth of 2.2% (previously 2.1%) in 2012 and 2.4% in 2013 (unchanged). The upwards revision to 2012 reflects the higher than expected September quarter outcome. Despite this positive base effect, we have left our 2013 forecast unchanged largely because we have lowered our short-term investment expectations. The main downside risks remain the possibility that fiscal policy will be significantly contractionary in 2013, and spill-overs if there were a major deterioration in the Euro-zone. email@example.com
0 equip & software (lhs)
-30 Sep-79 Sep-83 Sep-87 Sep-91 Sep-95 Sep-99 Sep-03 Sep-07 Sep-11
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, NBER Business Cycle Dating Committee (shaded areas represent recession periods).
Nevertheless, the weakness in business investment is worse than we had expected so we have reduced our short-term business investment forecasts further. However, this sets up the possibility of a rebound in mid-2013 as delayed projects all come back on stream at the same time. The risk is that the downturn is more embedded and spreads to the labour market, undermining the recovery. Monetary policy will continue to support the economy as much as it can – the monetary policy stance is highly accommodative and the Fed has indicated a willingness to do more if growth disappoints. The major immediate decision for the Fed is whether to undertake additional asset purchases once its Maturity Extension Program (‘Operation Twist’) finishes at the end of this year. Given that GDP growth of the magnitude seen in the September quarter is not enough to see a sustained reduction in the still high unemployment rate (indeed it could see an increase), the uncertainties to the outlook due to the weakness in business
Washington Post, White House considering new tax cut, 26 October 2012
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29 October 2012
US Economic & Financial Forecasts
Year Average Chng % 2011 US GDP and Components Household Consumption Private fixed investment Government Spending Inventories* Net Exports* Real GDP 2.5 6.6 -3.1 -0.2 0.1 1.8 2012 1.9 8.1 -1.4 0.1 0.0 2.2 2013 2.3 6.7 -0.5 0.1 -0.1 2.4 2012 Q1 0.6 2.4 -0.8 -0.1 0.0 0.5 Q2 0 .4 1 .1 -0.2 -0.1 0 .1 0 .3 Q3 0.5 0.4 0.9 -0.1 0.0 0.5 Quarterly Chng % Q4 0.6 0.9 -0.7 0.0 0.0 0.5 2013 Q1 0.5 1.7 -0.2 0.1 0.0 0.6 Q2 0.6 2.6 -0.2 0.0 0.0 0.8 Q3 0.6 2.5 -0.2 0.0 0.0 0.7 Q4 0.7 2.4 -0.2 0.0 0.0 0.7
US Othe r Key Indicators (end of period) PCE deflator-head line (yoy%) Headline 2.5 1.8 Core Unemployment Rate (%) 1.7 8.7 1.7 7.9 0.25 1.80
2.1 2.1 7.6 0.3 2.25
0.6 0.6 8.3 0.25 2.17
0 .2 0 .4 8 .2 0.25 1.62
0.4 0.3 8.1 0.25 1.72
0.6 0.4 7.9 0.25 1.80
0.5 0.5 7.9 0.25 2.00
0.6 0.5 7.9 0.25 2.10
0.5 0.5 7.7 0.25 2.20
0.5 0.5 7.6 0.25 2.25
US Key Inte rest Rates (end of period) Fed Funds Rate 0.25 10-year Bond Rate 1.98 Source: NAB Group Economics
*Contribution to real GDP
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29 October 2012
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