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11 Apr 2014

Chill remains in US economy

Kevin Logan

by Kevin Logan

Chief US Economist, HSBC

Chill remains in US economy

Manufacturing production this year experienced the biggest one-month decline since the 2008/09 recession

Severe winter weather has disrupted US production and spending. Manufacturing production this year experienced the biggest one-month decline since the 2008/09 recession and consumer spending tumbled, with big-ticket items hit hardest. Vehicle sales fell by an annualised 16 per cent and household furnishings dropped 11 per cent between November and February.

We have lowered our first-quarter GDP growth forecast from 1.7 per cent to 1.3 per cent – although we still expect overall growth this year of 2.5 per cent.

Much of the first-quarter slowdown should prove temporary with some of the lost spending made up later in the year. However, the underlying trajectory of the US economy has not changed, in our view. While the slowdown will probably be short lived, the subsequent rebound should not be viewed as a sustained acceleration in economic growth.

Two of 2013’s growth engines – home construction and inventory accumulation – appear set to slow this year.

Much of the first-quarter slowdown should prove temporary with some of the lost spending made up later in the year

Sales of existing homes peaked in summer 2013, shortly after the marked rise in longer-term interest rates that followed the Federal Reserve’s indication that a ‘tapering’ of its quantitative-easing programme would begin before the end of the year. New-home sales, which had surged in 2012, went flat and are unlikely to show much strength this year.

Inventory accumulation picked up noticeably last year. Firms that had hesitated to invest in stocks because of uncertainties surrounding federal fiscal policy in 2012 appeared to play catch up from mid-2013. Farm inventories also surged as agricultural output recovered from 2012’s widespread droughts: they accounted for about a quarter of last year’s economy-wide inventory increases.

We expect a slower pace of stock accumulation this year, shaving a few tenths of a per cent off the economy’s growth rate. Spending in other sectors must pick up to keep GDP growth moving upward.

Healthcare spending is one area that appears poised to help sustain GDP growth this year. Lost in the political controversy over the Affordable Care Act – Obamacare – is the apparent surge late last year in real spending on healthcare the act seems to have provoked. That surge has helped maintain positive GDP growth in the first quarter of 2014: indeed, without it, overall consumer spending was on the verge of an outright decline.

Consumer spending on goods should bounce back with the return of more seasonal weather. A vigorous rebound in outlays on durable goods is likely in the second quarter before a return to the underlying trend determined by the growth in employment and income.

However, the acceleration in healthcare spending will probably slow as the year goes on. We believe the surge can be attributed to early enrolment for Obamacare, but as more people sign up, total healthcare expenditure will increase at a slower rate.

While health insurance is subsidised, most consumers have to pay at least part of the premiums, leaving less to spend on other consumer goods and services. Spending elsewhere will probably grow at a slightly slower pace. Nevertheless, the unexpected surge in healthcare spending offset the weather-related drop in consumer spending in the first quarter and the likely growth in GDP this year should be close to our previous estimate of 2.5 per cent.

This research was first published on 31 March 2014.
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