My new favourite US observer, Westpac’s Elliott Clarke, is back with a note today assessing the damage from the Tea Party accident that now appears over:
As has tended to be the case in recent years, the latest fiscal impasse has seemingly been resolved with a last minute deal which delays the fiscal debate until early in the new year. Under the deal agreed to by Senate leaders, the government will be funded until 15 January and the debt ceiling will be raised until 7 February. The deal makes provision for the Treasury to use ‘extraordinary measures’ once the debt ceiling has been reached, so the US Federal Government will be able to fund itself for a time past the official 7 February debt ceiling deadline – as occurred in the current episode.
As part of the deal, a combined House and Senate committee will be established to negotiate (very necessary) long-term budget reforms, although at this point the scope of the committee’s mandate remains unclear. What is also unclear is how the next spending and debt ceiling ‘negotiations’ will play out. On this point, we will have to wait and see what the response of the Republican caucus is to Speaker Boehner’s decision to flip his position and back the Senate deal. Also key to the next round of discussions will be both sides position on the balance of the previously agreed sequester, set to impact government spending from early in the new year.
At this point, the only thing that is certain is that this crisis has had a material impact on Q4 activity (likely in the region of 0.5ppts) and more importantly on the confidence of business and consumers. In particular, what is key in this instance is that the perpetuation of uncertainty into 2014 gives little reason for firms to seek to expand their operations through investment or hiring, both of which had already been deteriorating ahead of the shutdown.
Weak investment growth has near-term aggregate growth implications and is also a concern for the US’ long-term productive capacity. But given the importance of household consumption to aggregate activity, the biggest risk for the outlook lies with firms’ employment decisions.
Ahead of the shutdown, three month average nonfarm payrolls employment growth had slowed from over 200k to less than 150K in August. The household survey figures pointed to an even weaker pace of employment growth, averaging around 110k through 2014.
It will be some time before we are able to get a clear read on the labour market post-shutdown, but a logical expectation given recent events and the lack of a long-term solution is that we will see soft employment growth through the remainder of 2013 and into 2014. This trend looks set to restrict consumption growth to a sub-par pace, with any bursts of credit-supported durables growth offset by weakness elsewhere. Soft employment growth also poses a risk to the housing market, already weakened by the sizeable rise in mortgage rates through 2013.
While out of view now, it is also important to realise that continued soft employment growth will not provide the rapid tax receipt growth anticipated by fiscal authorities in 2013 and (if sustained) beyond, the likely result being a protracted fiscal debate over spending and tax reform as it becomes clear that a growth dividend will not solve the US’ structural receipt/spending mismatch.
The key consequence for 2014 of these recent developments and the seeming inability of the US economy to grow consistently at an above-trend pace lies with monetary policy. Indeed, not only does it now seem far too early to taper, but if our growth expectations prove correct, it may not be too long before we are discussing whether the Fed should loosen policy further.
In her time as Vice Chair, Janet Yellen has repeatedly emphasised the importance of achieving a strong recovery in the labour market. Ergo, it will remain front and centre to the policy debate. Further, the FOMC arguably remains firmly of the view that QE has been, and remains, an effective policy tool. As we have previously highlighted, this was made clear in recent comments from NY Fed President Dudley and St Louis President Bullard. Between now and when Chair-elect Yellen officially takes control, expect the tone of FOMC communications to maintain a dovish tilt, with a clear focus on fiscal risks. And, at the December meeting, further downward revisions to the 2013 and 2014 growth forecasts will almost certainly prove necessary given the impact of the current shutdown.
This is another challenge for Australia. The dollar will be under more upwards pressure and rates will be lower for longer (as if they were ever going to be anything else). It will further pressure the composition of Australian growth pushing it further away from tradables and towards even more reliance upon the consumer even as the capex cliff steepens. Heaven forbid QE is expanded.
