There was a lot to digest this week, but at least no surprise came from the Fed that announced another USD 10 bn decrease in monthly security purchases. US bond markets are weathering quite well the tapering, which tends to support the hypothesis that they finally got that tapering is not tightening and that it is disconnected from the policy rate.
As stressed several times by Fed officials, even if QE3 is progressively winded down, the Fed keeps on providing extra accommodation every month. Taking into account that some strong headwinds have abated, especially the fiscal drag at the federal level, hopes are allowed that this will be sufficient to support the nascent acceleration.
This week data were not that encouraging, though. Admittedly, GDP growth was in line with our expectations of a limited slowdown (from 4.1% in Q3 to 3.2% in Q4, annualised quarterly rate), but the breakdown of demand was both surprising and source of some concern. In Q3, the pace of increase in activity was artificially lifted by a massive contribution from the inventory change, and we were expecting a pay-back in Q4. It however did not materialise, as inventories kept on increasing, bringing a small but positive contribution where we were expecting a negative reading. On top of that, international trade made a, impressive positive contribution of 1.3 pp as imports were almost flat and exports surged.
This left the final domestic demand much less buoyant than we had expected. The main drag came from another decline in spending from the federal government, and a marked decline in residential investment, probably linked with heightened mortgage rates, a downward trend likely to extend into early 2014 as pending home sales plunged 8.7% in December. On a more positive note, business spending on equipment rebounded, and households once more saved the day with their consumption. But prospects for those two major components of demand are not that steady. Without a substantial improvement in labour market conditions, a clear acceleration of consumption seems hard to achieve, while the latest data for business spending on equipment were rather disappointing, as new orders for non-defence capital goods excluding aircraft fell by 1.3% m/m in December.
Additionally, the trend in prices is not comforting at all. The GDP deflator was up 1.4% y/y, the same rate as over the previous two quarters. But going two-digit, we can spot a deceleration from 1.44% in Q2 to 1.38% in Q4. The deflator for consumption is particularly worrying. The price index for durable goods is down, but this is no cause of concern as it is the component that is the most impacted by the “quality effect” (even if the price of a car is not going down, the fact that it now comes with air conditioning makes it more valuable, and this leads to a decrease in the price index). But the index for non-durable goods just entered the negative zone, a first since the end of the recession, while services prices are decelerating.
And then, nominal GDP, measured in current dollars, is pointing to a deceleration in final domestic demand, up an annualised 2.8% in Q4, versus +4.2% in Q3. In 2013 as a whole, nominal GDP was up by a limited 3.4%, the slowest pace of growth since the end of the recession, that conclusion being true for every single component bar residential investment.
These results are rather disappointing. For one thing, households have been relying on past savings to pay for consumption, a trend than cannot go one forever. For consumption to hold up in 2014, an acceleration in labour income will be needed. And latest data for weekly initial claims are not pointing to a labour market much more dynamic in January than in December. Taking into account we expect the December job creation figure to be upward revised in the vicinity of 130-140k, non-farm payrolls are likely to have gained only 170k in January. As for the unemployment rate, it will once more depend on the labour participation ratio. It could either go up, correcting the December weakness, or down, as the end of benefits for those unemployed for more than 26 weeks could have prompted them to stop looking for a job.
Sure enough, and apart from long-term unemployment benefits, fiscal policy should be neutral for growth this year, lifting a heavy brake. On the other hand, the recent downturn in residential investment is negative on growth, while the kind of performances US exports recorded in Q4 are not to be reiterated. Even if we do agree that prospects are better oriented for 2014 than they were for 2013 a year ago, we still cannot find any sign of actual acceleration within the data.
Next week will be released January reports for the ISM surveys and the labour market. Lets’ hope they will provide us with some evidence that the US economy is accelerating.
BY Alexandra ESTIOT