From Westpac’s Elliot Clarke comes the below report questioning whether the current above-trend pace of economic growth in the US can be maintained:
The acceleration in US GDP growth seen during the second half of 2013 has given support to FOMC and market expectations of stronger growth in 2014. As currently reported, annualised GDP growth has risen from a sub-par 1.8% in the six months to June 2013 to a decidedly above-trend 3.7% for the six months to December 2013. If sustained, such a growth pace would not only argue for a rapid end to the tapering process, but also initial steps towards rates normalisation.
The problem is that the acceleration in growth experienced through 2013 has not come about from domestic end demand (on which the US typically depends), but rather the accumulation of inventories and, to a lesser extent, a contribution from net exports.
The impact of inventory accrual was most obvious in Q3 when it contributed 1.7ppts to the 4.1% annualised headline. This was followed by a further 0.4ppt contribution in Q4 as stocks were accumulated at an even faster clip into year end. Periods of rapid inventory accumulation are almost always fleeting, with end demand and supply inevitably brought back into line, one way or another.
The acceleration in inventory accrual over the six months to December was largely centred in the wholesale and retail space, with manufacturers reported to have added to stocks at a slower pace in Q4. It is interesting to note that not only has the manufacturing ISM’s inventories measure fallen 8.5 points over the three months to January (to a contractionary reading of 44), but that the non-manufacturing measure has also fallen 6.5 points over the two months to December (to 48). In addition, the manufacturing ISM new orders measure also fell sharply in January, arguably giving firms in this sector little reason to restock in the near term. All told, these outcomes point to potential downward revisions to stocks’ Q4 contribution and/or a reversal of H2 2013’s growth spurt come early 2014.
Also supportive of an end to the rapid 2013 inventory accumulation is the ongoing poor tone of domestic final end demand growth which still remains well and truly below trend – domestic final end demand includes private consumption and investment as well as government spending.
In Q4, annual domestic final demand growth came in at 1.6%, unchanged from the three preceding quarters and a fair way below the 2.4% average of 2012. The often mentioned drag from the government sector was a contributing factor to the weak state of affairs in 2013, with the drag increasing from–0.2ppts in 2012 to –0.4ppts in 2013. The other key contributor to the deceleration in domestic final demand in 2013 growth was a halving in the contribution to growth from investment, broadly spread across business and residential activity. Arguably existing spare capacity and the limited domestic growth opportunities brought about by modest job growth, negligible real income growth and households’ indebtedness continue to restrict firms’ willingness to invest onshore. A material, rapid acceleration in business investment in the near term therefore seems improbable.
For households, spending looks at risk of a pull back. Specifically, the change in the contribution from housing and utilities services between Q3 and Q4 was equal to around half of the increase in total consumption’s growth contribution, pointing to a potential (temporary) positive weather effect. Also supportive of this notion was the Q4 turnaround in clothing and footwear sales.
Abstracting from any weather impact, the more pressing concern in the consumer space is the continued decay of households’ financial welfare. Through 2013, consumers increasingly took advantage of the freer availability of consumer credit. The result was strong demand for autos, but only at the expense of consumers’ savings. As at December, the household saving rate stood at 3.9%, down more than a percentage point from September’s 5.1%, once again near its post-GFC lows.
The accrual of debt has not been the only culprit, with a 0.4% decline in real personal disposable income since September also contributing to the fall in the savings rate. For stronger consumption growth to prove sustainable (and support an expansion of firms’ productive capacity), we need to see healthy growth in real disposable incomes which outpaces price rises for life necessities (such as health and housing), something that has remained absent in the post-GFC environment.
While we expect that growth in domestic end demand will remain modest in 2014 and that less inventory accumulation will weigh on headline growth outcomes, external demand should remain supportive. Through 2013, export growth was driven by strong gains for ‘food, feeds & beverages’, ‘industrial supplies & materials’ and, to a lesser extent, vehicles and other consumer goods. For the first sub-category, the lingering effects of the drought are a downside risk for 2014. More broadly, it remains more profitable and efficient for US firms to invest offshore to meet international demand than to expand their domestic operations. This may change with time as relative input costs change, but not in a hurry.