United States Forecast Summary
The advance data on first quarter GDP were generally in line with our expectations. The headline number for total real output came in at 2.5%. This was marginally above our February forecast of 2.2%. The underlying details were also in line with our view – a domestic private sector that is doing reasonably well (but not great), with problems in the public and international sectors. Given this, our forecast is relatively unchanged. We continue to expect slow growth for the rest of 2013, with acceleration during 2014.
At first glance, with real GDP growth up by 2.1%, the first quarter appears to be significantly better than the final quarter of last year. On closer examination, however, this is not the case. All of the improvement (and then some) was due to a shift from decumulation of inventories to accumulation. Beyond that the differences from the fourth quarter consisted of two sets of offsetting changes. In the domestic private sector consumption was stronger while business investment was much weaker. In the trade and public areas, the former shifted from a positive to a negative, while the latter became less negative.
Recent monthly data have been a mixed brew, which we prefer to see as a glass half full.
Labor market data from the BLS for April were more than half full. The private sector added 176 thousand jobs. In addition the private sector increase for February was raised by 65 thousand (to 319 thousand) and that for March by 59 thousand (to 154 thousand). Over the past six months private payrolls have increased by an average of 216 thousand per month. All of these are respectable (or better) numbers.
The data from the household survey were also positive. The unemployment rate ticked down again, to 7.5% from 7.6%. The survey also showed growth of 210 thousand in the labor force and a 293 thousand rise in employment.
Other monthly indicators are more ambiguous:
- Household real income and consumption both rose by 0.3% in March (monthly rate). Over the past six months consumption has risen at a 2.6% annual rate, double the increase in disposable income. This has lowered the personal saving rate to just 2.7%. It suggests that the full impact of recent tax increases is still to be felt.
- Consumer sentiment indicators rose in April, but remain down from last fall.
- The April ISM indices both declined and both are below their year-ago levels. The manufacturing index only barely indicates expansion.
- Housing starts rose strongly in March to 1.036 million. This is their highest level since June 2008. Building permits fell, however, and are basically flat over the past seven months.
- Industrial production rose in March, but manufacturing was down slightly.
- Auto sales fell to just below 15 million in April. We are comfortable with our 2013 full-year forecast of 15.3 million. This compares with 14.4 million in 2012.
- The Federal Reserve last week indicated it would maintain the status quo both for interest rates (a federal funds rate near zero) and for quantitative easing (net asset purchases of $85 billion per month).
To summarize: The private sector held its own in the first quarter. Monthly data suggest that should remain the case in the near term. There was also a continuing drag from the public sector and from international trade.
The data reviewed above have resulted in little change to our baseline forecast. Our model has become slightly more positive concerning the outlook for the next two quarters, and very slightly so for 2014. Our estimate of GDP growth is just a hair below 2% for the current quarter, which is up about 0.4% from our February forecast. Our estimate of third quarter growth has increased by 0.3% to 2.1%. For all of 2013 we now see output rising 2.2% compared with 2.0% in February.
The pattern of activity we see in the next two quarters is close to that in the recent past. Some details:
- Households, faced with pressure on their disposable income from higher taxes, cut back on their spending. The retrenchment is moderate, however, as spending is supported by continuing growth in employment.
- Business investment recovers somewhat from the first quarter bust, but not to the really strong numbers seen in the fourth quarter.
- Residential investment continues to show double-digit growth.
- The trade balance continues to show deterioration (producing a negative growth contribution), but at a slower rate than in the first quarter. The same holds for government spending at both the federal and the state/local levels.
- We assume that inventory accumulation remains at a level close to the first quarter.
Farther out, we see the economy strengthening in 2014. The strengthening is due to moderate improvement across all sectors of the economy, including a swing in federal government spending from decrease to slightly positive. Consumption also rises, but at the cost of further decline in the saving rate.
The U.S. economy seems to have settled into a sustainable slow growth configuration. Suppose consumption grows at a 2.5% rate, investment at 5% (both business and residential), and government at just a little above zero. With a stable trade deficit and steady inventory accumulation, this will produce output growth of 2.5%. Recently we have been a little short of that due to falling government spending and some increase in the international deficit, plus noise from inventory swings. We expect this recent situation to persist for the next couple of quarters. Next year could be a little above par due to a continuing (but inevitably temporary) boom in housing, and strength in consumption. This assumes that there are no major shocks to the system. For this year that seems reasonable (but by no means a sure bet); for 2014 at least plausible.