Better Safe Than Sorry

The fundamentals of the US economy are improving. While the housing market is no longer a drag, the job market is picking up. As their financial situation has been restored, the households and business sectors will be the main drivers of growth. Although the negative impact from the fiscal adjustment will be slightly less significant this year than in the last two ones, it is will still weigh on activity. These positive developments will likely lead the Fed to slow down the monthly pace of security purchases under QE3. Satisfied with current trends, Chairman Bernanke has also stated that FOMC members wanted to make it sure, before taking any decision, that the improvement is to last. QE3 continues for the time being…

Q4 2012 not as so sluggish as at first sight
The initial estimate pointed to negative GDP growth in the final quarter of 2012 (-0.1%, annualised rate). Since then, this figure has been revised upwards even though it remains weak (to +0.1%). Nonetheless, details show an improvement in fundamentals, with final demand in the domestic private sector gaining 3.6%, the fastest pace since the third quarter of 2011. In fact, the weakness witnessed in late 2012 was the result of a massive reduction in certain defence spending (leading to a negative contribution from overall government spending of 1.3 percentage points), while the inventory change cut growth by 1.4 percentage points.

Final expenditure from households and the business sector was sustained, the former rising by 2.6% (+2.1% for consumption, +7.4% for residential investment), and the latter by 9.7% with a noticeably marked rebound in equipment and software expenditure (+11.3%). The end of last year also witnessed a pronounced acceleration in job creation. Between October and December, private non-farm payrolls grew by almost 700,000 positions, i.e. more than during the previous five months.

In a nutshell, the US economy was not hurt as badly as we had feared from the threat of the fiscal cliff1, while data for early 2013 seem to show that it is weathering the fiscal fix2 very well.

BY Alexandra ESTIOT

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