US: March quarter GDP growth is looking soft - NAB

Tony Kelly, Senior Economist at NAB, suggests that the US jobs growth, business surveys and consumer sentiment all point to an economy in good shape as March quarter GDP growth is looking soft but a weak start to the year has not been unusual in recent times.

Key Quotes

“Another solid jobs report, signs inflation – and wages – are rising as well as positive consumer sentiment and strong business survey readings all point to an economy in good shape.”

“However, the actual ‘hard’ data that will be used to put together the estimate of March quarter GDP is looking weak, and we have revised down our expectation for growth at the start of the year. We think this slowdown will be temporary. The Fed obviously also thinks so as it increased the fed funds target rate by 25bps in its meeting this week and continues to signal further, ‘gradual’, rate rises.”

“In February, the ISM surveys moved higher – the manufacturing survey reached its highest level since August 2014 and the non-manufacturing survey its highest level since late 2015. Consumer sentiment has improved noticeably since the Presidential election, and is back around pre-GFC levels.”

“There was also another solid jobs report for February, with a net gain of over 200,000 jobs for the second month in a row. This pace of jobs growth should be more than enough to reduce the unemployment rate over time. However, the decline in the unemployment rate has slowed recently due to a pick-up in workforce participation – against the long term, mainly demographic driven, trend decline. Consistent with a tightening labour market, wages growth appears to be strengthening.”

“At the same time, however, indicators of economic activity have softened. Consumption growth – which represents around 70% of GDP – actually went backwards in January. This was partly due to warmer than normal weather leading to reduced power consumption but even excluding this consumption fell. In February, temperatures remained above average, retail sales growth was soft (although January was revised up pointing to upwards revisions to the January consumption numbers) and there was no rebound in auto sales - so there is little sign of an upturn in February.”

“Trade data for the start of 2017 also point to another negative contribution from net exports in the March quarter. Government demand also looks subdued.”

“However, weakness at the start of the year in activity measures – as reflected in GDP – has not been unusual. Average growth in the March quarter has been well below that of other quarters in recent years.”

“Nor are all components of GDP look weak. Business investment indicators have improved, with equipment orders picking up and manufacturing capex intentions at their highest levels since the GFC. Early indicators also suggest that residential investment will record another solid quarter of growth. On the trade front, business survey measures suggest that the underlying trend is stronger for exports, and weaker for imports, than the volatile monthly trade data are showing.”

“As a result of the weakness in March quarter GDP indicators, we have lowered our expectation of growth in the quarter to 1.3% (annualised). However, as we expect this is essentially temporary, with some rebound likely in subsequent quarters, we have not lowered our expectation of growth for 2017 as a whole, which we still expect to be 2.1% and likely to move higher to 2.3% in 2018.”

“The forecast of higher growth in 2018 is driven by our expectation that there will be fiscal stimulus kicking in towards the end of 2017 and into 2018.”

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