American muscle - Economics weekly


American muscle - Economics weekly

The US is often described as the engine of the global economy.

Economic Analysis

09 December 2013

 

So last week's news of an upward revision to growth in Q3, continued expansion in manufacturing and services and a healthy fall in the unemployment rate will come as good news beyond the Land of the Free. The UK in particular is also benefitting from a jump start, with business activity data for November showing an economy that is motoring along nicely. And the Office for Budget Responsibility (OBR) made significant upgrades to the UK growth forecasts used by the Treasury.

Shutdown, what shutdown?

The US economy expanded at an annualised rate of 3.6% in Q3, leapfrogging the UK to become the fastest growing advanced economy. Although household consumption contributed about one percentage point to growth, there was a strong upward revision to stock building (firms storing up goods) that boosted GDP from its original 2.8% estimate. So, while the figures are undoubtedly good, they're flattered by bagging expected future sales now. There are two clouds on the horizon. First, the fiscal and debt ceiling debates continue. Second, household consumption is weakening. It grew at its slowest rate since 2009.

US looking good for growth

In addition to the strong Q3 GDP revision, survey data suggests the US economy is enjoying a decent Q4. Although the US equivalent of the service sector PMI recorded its lowest reading since June, falling from 55.4 to 53.9, it still points to robust growth. And new orders remained strong at 56.4. Meanwhile, the manufacturing sector grew at its fastest rate since early 2011. Similar to the services sector, new orders look strong at home and abroad.

Jobs, jobs, jobs

The US created 203,000 jobs in November, almost identical to October. Despite the government shutdown and debt ceiling uncertainty, hiring decisions of US firms appeared unaffected. The number of new jobs, coupled with the return to work of federal employees who were temporarily laid-off in October due to the shutdown, resulted in the unemployment rate falling from 7.3% to 7%, the lowest since December 2008 just after the collapse of Lehman’s. However, earnings are growing at just 2%y/y - higher than inflation but still very weak.

A brighter future for the UK

The OBR now expects the economy to expand by 1.4% this year, up from 0.6% at the time of the March Budget. For 2014, expected growth has been revised up from 1.8% to 2.4%. Importantly, the OBR stated that the positive surprise to growth this year was most likely due to temporary, rather than more permanent factors. This means that the forecasts for the part of the budget deficit that is not due to the business cycle and does not go away as the economy expands – what is called the ‘structural’ deficit – were slightly weaker than at the time of the Budget. However, net debt relative to the size of the economy is now expected to peak in FY 2015 at 80%, rather than at 85.6% in FY 2016.

Businesses firing on all cylinders

According to the latest PMI surveys of the manufacturing, construction and services sectors, the UK economy remains on track for a strong final quarter of the year. At 62.6, the construction PMI is at its highest level since August 2007, boosted by the resurgent housing market. The improving UK economy remains a key source of new manufacturing orders, helping the manufacturing PMI rise from 56.5 in October to 58.4. Although the services PMI declined from 62.5 to 60.0, that is still represents a healthy rate of expansion.

ECB poised

The European Central Bank (ECB) kept rates on hold at 0.25% at its December meeting, following a 25bps cut last month. The ECB expects inflation to remain low for a protracted period of time and cut its forecast for inflation to 1.1%y/y in 2014 and 1.3%y/y in 2015, a lot lower than its 2%y/y target. While the Bank doesn’t expect the euro area to enter a period of deflation, ECB President, Mario Draghi, stressed they are ready to act to preserve price stability and stimulate growth. The ECB expects the economy of the region to pick-up, expanding by 1.1% next year, and 1.5% in 2015.

A boost to global trade

After 12 long years and many hiccups, trade ministers from the 159 members of the World Trade Organization (WTO) finally reached a new international trade agreement. The centrepiece of the agreement will help reduce red tape and delays at ports by simplifying customs procedures. While this should help UK exporters, particularly those exporting to emerging and developing economies, the agreement falls well short of the ambitious agenda to cut tariff barriers when the negotiations were launched in Doha Qatar way back in 2001.

 

Disclaimer

This material is published by The Royal Bank of Scotland plc (“RBS”), for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by RBS and RBS makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of the RBS Group’s Group Economics Department, as of this date and are subject to change without notice. The classification of this document is PUBLIC. © Copyright 2013 The Royal Bank of Scotland plc. All rights reserved.

 

 

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