US Economy Update May 2014

Transcription

1 US Economy Update May 2014 MACRO REPORT Key Insights Monica Defend Head of Global Asset Allocation Research Annalisa Usardi Economist, US & LATAM Global Asset Allocation Research Also contributing Riccardo Soggiu Senior Economist, Central Banks Global Asset Allocation Research The U.S. economy expanded 1.9% in For the current year, due to the extraordinarily weak Q1 data, we have revised our forecasts downward and now see GDP growing in the 2.5% range year-over-year. While close monitoring is in order, we believe that the main drivers supporting a transition to self-sustained recovery remain in place. Growth: We revised our growth forecast to 2.3% in On April 30th, the Bureau of Economic Analysis released the advance estimate of Q114 GDP, which came in much lower than expected at an annualized 0.1% quarter-over-quarter, compared to 2.6% in 4Q13. We believe the weakness can be explained in part, but not entirely, by the extraordinarily bad weather conditions that affected the U.S. economy this winter. Inflation is expected to run at 1.7% in 2014 on average, gradually accelerating from the second quarter on. Federal Reserve: The next scheduled Fed meeting is on June 18. There is no scope for further cuts; QE is likely to continue to be tapered going forward if the economy develops according to the Fed s expectations, and completely wound down by the end of Interest rates could then start to slowly increase during 2015 (fed fund futures currently expect rates to start to rise above 0.25% in the summer of 2015). Macro Main Indicators GDP Growth YOY % CPI YOY % E 2015E 2016E E 2015E 2016E Source: Datastream, Pioneer Investments, Data as of May 8th,

2 1. Growth On April 30, the Bureau of Economic Analysis released the advanced estimate of Q114 GDP growth, which came in much lower than expected at 0.1% quarter-overquarter annualized, compared to 2.6% in Q413. The weakness can be explained in part by the extraordinarily bad weather conditions that affected the U.S. economy via multiple channels. However, in some cases the weather added to other factors in play. The harsh winter likely impacted the composition of personal consumption (e.g. higher expenditure on heating, lower expenditure on recreational activities). The high contribution of health care to expenditures may be best attributed to the ACA (Affordable Care Act). Harsh winter conditions likely affected residential investments, further weighing on a sector where the increase in mortgage rates in mid-2013 will be gradually absorbed by the demand side. Exports were a major drag on Q1 GDP. While exports may well have been affected by seasonal factors and a winter-related slowdown, they followed a general trend in world trade, which has been running below pre-crisis highs and slowing from the post-crisis expansion. Overall, we expect the U.S. economy to grow at a much faster rate in the current quarter, in the 3.5% range, and then to maintain a growth rate of around 2.8% in the second half of the year. While consolidating, growth in the U.S. economy will remain in the 2.5% area for calendar year 2014 (our current forecast is 2.3%) due to the weakness in Q1. Notwithstanding this revision, we still think the drivers of growth we highlighted in our initial outlook for 2014 remain in place, although monitoring is required. We expect the US economy to grow at 2.3% YoY in Figure 1. US GDP 6% 5% 4% 3% 2% 1% -1% -2% -3% -4% -5% Q1 92 Q1 94 Q1 96 Q1 98 Q1 00 Q1 02 Q1 04 Q1 06 Q1 08 Q1 10 Q1 12 Q1 14 Q1 16 QoQ % YoY% Source: Pioneer Investments, as of March 31, Real personal consumption expenditure (PCE) again posted a strong gain in Q1, growing at 3. annualized (versus 3.3% in Q413). However, looking in more detail at the composition of PCE, the main contribution came from services. Goods consumption, both durables and nondurable, was particularly weak. Household expenditures on healthcare and utilities were particularly strong. It is natural to see in this composition some reflection of the weather in creating consumption patterns that are not likely to be repeated in the coming quarters. We expect PCE to grow consistently at around a 3% annualized rate each quarter supported by a progressively improving labour market, the stabilization of disposable income and moderately growing wages. 2

3 Personal consumption expenditure should firm during the year. Figure 2. US Personal Consumption Expenditure 7% 6% 5% 4% 3% 2% 1% -1% -2% -3% -4% Q1 92 Q1 94 Q1 96 Q1 98 Q1 00 Q1 02 Q1 04 Q1 06 Q1 08 Q1 10 Q1 12 Q1 14 Q1 16 % QoQ % YoY Gross private domestic investment was overall very weak in Q1 and declined -6.1% due to negative contribution from both fixed investments and inventories. In particular non-residential investment was weak, posting a decline of -2.1%, largely to due to an especially steep fall in equipment investments of -5.5%. Residential investments declined -5.7% after falling -7.9% in 4Q 13. After the setbacks in Q413 and Q114, we expect some pickup in residential investments as the weather-related drag fades. Yet, the housing sector had shown some signs of softening even before the winter storms, as a consequence of the mid spike in interest rates which was accompanied by weakening housing demand. Although there are some signs of loosening (e.g. reduced down payment requirements), mortgage lending conditions overall remain tight. Our expectations are for a gradual and consistent improvement in growth for the residential sector, although it will average around 1.5% for the full-year 2014 mostly due to the first quarter weakness. The second half of 2014 will not see a repeat of the acceleration of the two previous years. Investments should accelerate in 2H Figure 3. US Non- Residential Fixed Investments 16% 8% -8% -16% -24% % QoQ % YoY Given the weak performance in Q1, prospects for non-residential investments have also been revised down for the year, and we now expect growth of close to 4% in The dynamics remain intact, with acceleration in the second half of the year, after some rebound in Q2. Strengthening internal demand and consistent corporate profitability present a favorable outlook for capital expenditure. With 3

4 capacity utilization now rising to approach long-term average levels, we expect that a push to increase investment should be the natural consequence of a strengthening economy and higher resource utilization. With respect to the other GDP drivers, government consumption expenditure represented a drag in Q1, unexpectedly declining -0.5%, thus subtracting approximately 0.1% from overall GDP growth). The negative performance of exports, which declined -7.6%, subtracted considerably from Q1 growth (-1.07%). A -1.4% contraction of imports was not enough to counterbalance the negative contribution from net exports. A decline of billion in inventories (chained 2009 USD terms) was also a drag on GDP (-0.56%). Figure 4. US GDP Contribution Household consumption and investments confirmed as main drivers of growth E 2015 E 2016 E Pers. Cons. Exp. Investments Gov. Cons. Exp. Net Trade Inv. Changes GDP 2. Inflation: Slowly Converging to the Target Turning to inflation, we expect a moderate pickup to occur over the year. For 2014 overall, our central forecast is for CPI to average 1.7%, converging at a moderate pace with the Fed s 2% target by the end of In the first quarter, CPI grew at 1.4%. Figure 5. US Inflation In our view, inflation will gradually pick-up towards the 2% target but we expect CPI to be subdued this year. 6% 5% 4% 3% 2% 1% -1% -2% -3% Q1 92 Q1 94 Q1 96 Q1 98 Q1 00 Q1 02 Q1 04 Q1 06 Q1 08 Q1 10 Q1 12 Q1 14 Q1 16 QoQ % YoY% In March, headline CPI accelerated 0.2% month-over-month (1.5% year-overyear), with the food component growing 0.4% MoM (1.7% YoY) and the energy component declining -0.1% MoM (up 0.6% YoY). 4

5 Core CPI increased 0.2% MoM (1.7% YoY), with core services the biggest contributor, up 0.3% MoM (2.3% YoY). Shelter inflation (owner equivalent rent and rents) was the main driver in the March core services increase. Core goods prices were unchanged in March (down 0.4% YoY), remaining in mild deflationary territory. Should this trend start to revert, the convergence towards a higher inflation rate could be more rapid than currently envisioned under our forecast. The PCE deflator, the Fed s preferred inflation gauge, increased 0.2% in March (1.1% YoY, up from January s 0.9% YoY), with the core component also growing 0.2% MoM (1.2% YoY). 3. Central Bank Policy: Tapering to Continue Tapering to continue at the current pace if the economy develops according to Fed s main scenario. Beginning in May 2014, the Fed will be buying $20B of mortgage-backed securities and $25B of long-dated Treasuries each month. This is down a cumulative $40B from the 2013 pace, after reducing asset purchases by $10 billion at each of its last four meetings, starting in December The Fed in its April statement noted that growth in economic activity has picked up recently and forecast that economic activity will expand at a moderate pace and labor market conditions will continue to improve gradually. In this vein, it is relevant to note that the April unemployment rate of 6.3% was the lowest since On inflation, the Fed noted that the Committee recognizes that inflation persistently below its 2% objective could pose risks to economic performance. The Fed indicated that if incoming information broadly supports the Committee s expectations of ongoing improvement in labor market conditions and inflation moving back towards its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. The Fed, however, specified that asset purchases are not on a preset course and further reassured on interest rates, reaffirming its expectation for low interest rates going forward and further stating that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 0.25% target range, the committee will assess progress both realized and expected towards its objectives of maximum employment and 2% inflation. The next scheduled Fed meeting is on June 18. There is no scope for further rate cuts. A tapering of QE is likely to continue if the economy develops as the Fed currently forecasts (GDP growth around 3% in 2014 and 3-3.5% in 2015, with unemployment around 6% by the end of 2015). QE will likely be completely wound down by the end of Interest rates could then start to slowly increase during 2015; fed fund futures currently expect rates to start to rise above 0.25% in the summer of As a side note, given the weak Q1 GDP data, it is likely the Fed will revise its central forecasts for annual GDP growth in Still, in recent testimony Chair Yellen seemed to attribute the recent weakness to temporary and partly weatherrelated effects and to be confident in the growth outlook for the remainder of the year. Specifically, Yellen noted: Although real GDP growth is currently estimated to have paused in the first quarter of this year, I see that pause as mostly reflecting transitory factors, including the effects of the unusually cold and snowy winter weather. With the harsh winter behind us, many recent indicators suggest that a rebound in spending and production is already under way, putting the overall economy on track for solid growth in the current quarter. 5

6 Triggers Stronger-than-expected global demand could support both confidence and exports and somewhat offset the impact from weaker growth in emerging economies. Improvements in consumer balance sheet stability, coupled with stable income growth and the labor market s progressive healing, could support higher patterns of consumption. Improving business sentiment coupled with better internal and external demand outlook could support acceleration in capital expenditures, which have been somewhat disappointing so far. Risks A significantly stronger dollar might adversely impact the export sector by making U.S.-produced goods and services more expensive in foreign markets. After the multi-year forced deleveraging, the U.S. consumer might be more reluctant to re-leverage, subtracting steam from residential sector growth. Some protracted and non-weather-related weakness in the real estate sector could lead to in lower growth prospects. Renewed geopolitical tensions, involving directly or indirectly the U.S. (the present stand-off with Russia over Ukraine comes to mind), could be highly disruptive for the flow of oil and for financial markets in general. 6

7 4. Macroeconomic US E 2015E 2016E E* 2015 E* Macroeconomic s Q1 Q2 Q3 Q4 Q1 Q2E Q3E Q4E Q1E Q2E Q3E Q4E GDP & Components YoY% % QoQ Annualized % QoQ Annualized % QoQ Annualized GDP Personal Consumption Expenditures Government Consumption Expenditures Fixed Investment Nonresidential Residential Total Internal Demand Total Consumption + Fixed Investment+Inventories Final Internal Demand Total Consumption + Fixed Investment Exports Imports GDP Contributions Net trade Inventories changes Economic Trend % YoY % YoY % YoY Industrial Production Corporate Profits (with IVA and CCAdj) Hourly Compensations Unit Labour Cost Productivity (H Compensation - ULC) Import Prices Index Disposable Income Producer Prices Index Consumer Prices Index Export Prices Index Capacity Utilization Unemployment Rate MZM Monetary Index Source: Pioneer Investments. Update as of 8th of May 2014; for time series with higher frequency (monthly or daily) than quarterly, we consider the quarterly average; in Italic exogenous variables; GDP components on quarterly frequency are %Q/Q annualized rates; all other figures, if not otherwise specified, are %Y/Y. Important Information Unless otherwise stated, all information contained in this document is from Pioneer Investments and is as of May 14th, Unless otherwise stated, all views expressed are those of Pioneer Investments. These views are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could result in the loss of all capital invested. This material does not constitute an offer to buy or a solicitation to sell any units of any investment fund or any services. Pioneer Investments is a trading name of the Pioneer Global Asset Management S.p.A. group of companies. Date of First Use: May 20,