This Week In The US: Vigorous Growth, C3% In Q1 2013

There is no end to the good news and growth may well have been very strong in Q1. However, no change in the stance of monetary policy is to be expected yet.

Last week, we were wondering whether we were being too cautious with respect to US growth this year. February retail sales were yet another development to put our conservatism to the test - and our cautiousness is in fact very relative in comparison with our competitors’ forecasts. Indeed, despite the hike in the payroll tax rate on January 1st, household consumer spending hardly slowed down.

Up 1.1% month-on-month, retail sales were robust, since they rose at a fast pace not only in volatile components, such as automobiles, or items that depend to a large extent on price fluctuations, such as gasoline, but across the board. Excluding cars, gas stations, food services and building materials, they grew 0.6% month-on-month, or at a 5.4% annualised rate. At the same time, core consumer prices grew by just 1.9% (annualised rate). Excluding volatile categories and deflated by the core consumer price index, retail sales therefore gathered significant momentum between December and February, up from 2.2% to +3.5% at a 3-month annualised basis. In a nutshell, household consumption definitely seems to be accelerating and not decelerating, after gaining 2.1% in Q4 2012.

The early payment of bonuses and of dividends resulted in vigorous disposable income growth in December 2012, and this extra cash was saved. Savings flows by consequence climbed from USD 313 bn (or 2.4 points of disposable income) between November and December. Between December and January, the hike in the payroll tax rate, up from 4.2% to 6.2%, led to a USD 127 bn increase in these levies. Accordingly, this lowered household income, and the fact that consumption remained robust, up 2.9% in real terms (annualised rate), was due to the savings rate dropping back to 2.4%.

While we were expecting a moderation in February retail sales, the data contradicted our forecast: the sharp acceleration in job creation in month-on-month terms, apparently, was able to generate income and confidence, resulting in a further increase in consumption. Moreover, employment is continuing to hold up well, as was illustrated by the new drop in claims for unemployment benefits during the first week of March, down to 332,000, or the same level as in the autumn of 2007.

Growth in activity, therefore, may well have rebounded quite noticeably in Q1 2013, since monthly data covering private consumption, capital goods shipments, inventory change and exports all trended positively, while the massive decline in certain kinds of military expenditure that occurred in Q4 2012 will not be repeated. To sum up, everything points to vigorous growth, of around 3% (annualised rate) in Q1 2013.

After Q1, there is more uncertainty about how the economy will perform, notably due to automatic spending cuts, the so-called sequester, taking effect on March 1st. This is all the more the case as the very future of these measures remains uncertain as long as Congress does not pass the appropriation law that will enable the federal government to operate after March 27th, when the current law expires1. The direct effect on employment will likely be muted: while most federal civil servants will be furloughed, i.e. face periods of involuntary and unpaid leave, technically they will not be unemployed and therefore will probably continue to be recorded as part of government payrolls. For workers of States and local authorities, the effects are more difficult to gauge, as these authorities will suffer from a reduction in federal subsidies. However, the finances of these governments have been improving thanks to the cyclical upturn (revenues are closely linked to retail performances). Accordingly, they might be able to absorb part of the decline in revenues without having to cut their expenditure excessively.

The FOMC will meet next week against this backdrop. This meeting will coincide with the release of the economic forecasts of the committee’s members and a press conference held by Fed Chairman Ben Bernanke. Since the meeting held in late January, economic data have been more encouraging than expected although uncertainties have not been entirely dispelled. Accordingly, a change in the stance of monetary policy is very unlikely, and the FOMC should therefore announce unchanged amounts of monthly purchases of securities. Under the third wave of quantitative easing (QE3), the Fed buys USD 40 bn of MBS and USD 45 bn of longdated Treasuries, and this pace will likely be confirmed next week.

Ben Bernanke’s press conference might be far more informative than the text of the press release. In particular, the issue of the forthcoming slowdown in purchases of securities is bound to be raised. Several FOMC members have voiced their opinion on this issue. For instance, Vice Chair Janet L. Yellen has clearly stated which indicators she monitors2. Given the Fed’s policy of clearer communication, Ben Bernanke will quite likely spell out what economic conditions would lead the Fed to slow down the pace of its purchases. Nevertheless, he will also have to remain rather vague in order to keep all his options open.
BY Alexandra ESTIOT