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US: Solid growth

Thu, Oct 29 2009, 18:13 GMT
by Peter Possing Andersen, Signe Roed-Frederiksen

Danske Bank A/S

• The first estimate of Q3 US GDP was slightly below our estimate but nevertheless showed a firm increase in production. 
• Private consumption is boosted by cash-for-clunkers and there will be some negative payback in Q4. A deeper inventory liquidation in Q3 than we expected leaves some upside risks to our growth forecast for the coming quarters. 
• Going forward we expect around 4% q/q AR GDP growth in Q4 and Q1, partly because the pace of inventory depletion is slowing and partly due to the ongoing recovery in domestic demand.

Details:

US Q3 GDP growth came in at 3.5% q/q AR – above consensus but below our estimate. The details of the report were in line with our expectations although inventories contributed somewhat less to growth (+0.9pp) than we had expected (+1.5pp). This implies a bigger boost to GDP from a stabilisation in inventories in the coming quarters and hence some upside risks to our forecast for Q4 and Q1. On the other hand, structures declined less than expected (9.0% q/q AR) and there is thus more adjustment to be done in this sector. 
Personal consumption showed a robust gain of 3.4% q/q AR. Although much of this increase can be attributed to the “cash-for-clunkers” boost to auto sales, spending excluding motor vehicles nevertheless grew a decent 1.8% q/q AR. There is however no doubt that there will be some negative pay-back in Q4. 
Residential construction increased 23.4% and posted the first positive contribution to growth since Q4 05. We expect the recovery in residential construction to continue into 2010 and thereby remove a big drag on growth. Over the past three years this sector has dragged down GDP growth by on aveage1pp each quarter. 
Equipment and software spending increased 1.1% which is a firmer gain than indicated by recent durable goods reports. Government spending grew 2.3% q/q AR, less than expected, with state and local spending down 1.1%. Foreign trade recovered with export growth at 14.7% q/q AR and imports growing 16.4%. This leaves net exports as a negative contributor to growth, subtracting 0.5pp. 

Assessment and outlook

Going forward we continue to expect around 4% q/q AR GDP growth in Q4 and Q1, partly as the pace of inventory depletion slows and partly as domestic demand continues to recover. That said, consumer spending is likely to make a smaller contribution in the near term as the cash-for-clunkers scheme will provide a negative pay-back in Q4. Instead we look for solid contributions from equipment and software spending and residential construction going into next year.

The recovery in consumer spending is likely to be more gradual than usual and requires that the initial boost to growth from inventories and stimulus-driven spending is transformed into jobs, in turn generating real income for households. So far we are optimistic about this, although the impact from GDP growth on jobs seems to be slightly behind schedule. However, weekly jobless claims suggest that the October reading in non-farm payrolls should be substantially better than September’s.

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Published on  Thu, Oct 29 2009, 18:18 GMT