US Economy Rebounds Strongly
1st August 2014
Keith Wade, Chief Economist at Schroders, comments on yesterday's US GDP figures, which far outstripped expectations with growth of 4%.
"Within the details, consumer expenditure was the largest contributor to the quarterly figures (+1.7 percentage points) as households took advantage of the continued improvement in real disposable income. Consumption of goods, particularly motor vehicles, was stronger than has been in recent quarters - a sign that households are gaining the confidence to make large ticket purchases. Investment also made a positive contribution (+0.9 ppt) after a flat first quarter. We look for corporates to increase capex as confidence in the wider economic recovery solidifies. Meanwhile, net trade made a small negative contribution (-0.6 ppt) as imports outpaced exports over the quarter. Government spending made a negligible impact (+0.3 ppt), but the positive contribution from changes in inventories was very large (+1.7 ppt). Normally, the large contribution from inventories would be a concern as it would signal demand not keeping up with supply, however, the rise in Q2 follows contractions in the previous two quarters, and so is to be expected.
Included in the GDP release is the personal consumption expenditure (PCE) inflation index – a favourite measure of household inflation for the Federal Reserve. PCE inflation accelerated to 2% annualised in Q2 – in line with the Fed's inflation target, although not using an annual comparison (1.6%). Although we do not expect a material change in monetary policy this month (only additional tapering of QE as widely expected), Fed chair Jane Yellen has recently warned that rate hikes would be more rapid than market expectations if the labour market continues to outperform FOMC expectations. Such a comment supports our baseline forecast that US interest rates will rise ahead of market expectations to 1.5% by the end of next year and move higher in 2016. Indeed, today's growth and inflation figures add further evidence that the economy is on a stronger footing than many expect."
