Danske Research Team
Danske Bank A/S
As expected, the first estimate of US national accounts in Q4 showed that US growth slowed significantly in Q4. The US grew 0.7% q/q AR (Danske Bank estimate 0.2% q/q AR, consensus 0.8% q/q AR). Private consumption grew 2.2% q/q AR, contributing 1.46pp to GDP growth in Q4. The US economy has been driven mainly by private consumption over the past couple of years. Net exports and inventories dragged GDP growth down by 0.5pp each. Gross private domestic investments declined 2.5% q/q AR in Q4 and thus dragged GDP growth down by 0.41pp. However there were large differences across assets. While residential investments increased 8.1% q/q AR, structures and equipment fell 5.3% q/q AR and 2.5% q/q AR, respectively. The latter partly reflects the slowdown in the US manufacturing sector and partly lower oil investments. Investments in shafts and wells declined 38.1% q/q AR in Q4. The sharp fall in oil investments is dragging down GDP growth but, in terms of employment, it is less of a concern, as most Americans are employed in the service sector.
We expect the US to continue to grow at a moderate pace this year. However, since oil investments will probably continue to drag down growth for some time and the manufacturing sector is still struggling, it depends almost solely on US consumers. We expect private consumption to continue to be the main growth driver supported by higher employment, positive real wage growth and high consumer confidence. Consumer confidence in January was relatively unaffected by the financial market turmoil. However, the risk is that the slowdown in the energy and manufacturing sector will have negative contagion effects on the rest of the economy.
The first estimate confirmed that the Fed increased the Federal funds rate at the same time as the economy slowed, which the FOMC statement from the meeting held earlier this week also recognised. However, the labour market is key to understanding why the Fed made the initial lift-off as the labour market is more or less back to ‘normal’ as the Fed lives in a Phillips curve world. This said, slower GDP growth in Q4, weak manufacturing data, subdued core inflation low market inflation expectations and financial market turmoil explain why the Fed was relatively dovish in the latest FOMC statement. While today’s release supports our view that the Fed will stay on hold in March, our main scenario is still that it will hike for the second time in April, although there are downside risks to this call, as, in our view, the Fed will not risk tightening too much, too quickly. Our expectation is based on our main scenario, which is that financial stress will ease and data will rebound. For more details, see FOMC review: Less ‘confident’ Fed likely to stay on hold in March as well, 27 January.
Focus is now on the January jobs report due next Friday, as the strong development in the labour market is one of the few bright spots left in the Fed’s ‘chart book’. If we see a strong report, it is likely to confirm that the economy continues to grow at a moderate pace. However, if the report is weak, it could be a game changer for the Fed and could also weigh significantly on market sentiment, as some of the market anxiety is due to US growth concerns.
We expect the US to continue to grow at a moderate pace this year. However, since oil investments will probably continue to drag down growth for some time and the manufacturing sector is still struggling, it depends almost solely on US consumers. We expect private consumption to continue to be the main growth driver supported by higher employment, positive real wage growth and high consumer confidence. Consumer confidence in January was relatively unaffected by the financial market turmoil. However, the risk is that the slowdown in the energy and manufacturing sector will have negative contagion effects on the rest of the economy.
The first estimate confirmed that the Fed increased the Federal funds rate at the same time as the economy slowed, which the FOMC statement from the meeting held earlier this week also recognised. However, the labour market is key to understanding why the Fed made the initial lift-off as the labour market is more or less back to ‘normal’ as the Fed lives in a Phillips curve world. This said, slower GDP growth in Q4, weak manufacturing data, subdued core inflation low market inflation expectations and financial market turmoil explain why the Fed was relatively dovish in the latest FOMC statement. While today’s release supports our view that the Fed will stay on hold in March, our main scenario is still that it will hike for the second time in April, although there are downside risks to this call, as, in our view, the Fed will not risk tightening too much, too quickly. Our expectation is based on our main scenario, which is that financial stress will ease and data will rebound. For more details, see FOMC review: Less ‘confident’ Fed likely to stay on hold in March as well, 27 January.
Focus is now on the January jobs report due next Friday, as the strong development in the labour market is one of the few bright spots left in the Fed’s ‘chart book’. If we see a strong report, it is likely to confirm that the economy continues to grow at a moderate pace. However, if the report is weak, it could be a game changer for the Fed and could also weigh significantly on market sentiment, as some of the market anxiety is due to US growth concerns.
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