Economics US
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Global Research
US Economic Outlook
Lower 2013 growth forecast on slow start to year
New data show 2013 got off to a slower start than previously estimated; the slow start lowers our forecast for 2013 GDP growth to 1.5% from 1.8% Our 2.4% GDP forecast for 2014 is unchanged Our expectation for weak growth in the near term means we do not expect the FOMC to start QE tapering until December
Extensive revisions to historical US GDP data show the average growth rate from the end of the recession to the first quarter of 2013 is now estimated at 2.2%, compared to 2.1% previously. This increase in measured output is not enough to change our views on the growth of potential GDP or on how much slack currently exists in the economy. The revised GDP data do have an impact on our forecast for the growth of GDP this year. The new data show a slower rate of growth than before for Q4 2012 and Q1 2013. That means 2013 got off to a much slower start than previously estimated, and that the average level of GDP over the four quarters of 2013 will likely be lower than we previously forecast. In late June we estimated a 1.8% increase in the average level of GDP in 2013 compared to 2012. With the revised data in hand, that estimate falls to 1.5%. Our forecast for growth in 2014 is unchanged at 2.4%. On a Q4 to Q4 basis our forecast for 2103 GDP growth is only slightly changed, down to 1.9% from 2.0%. For 2014, the Q4/Q4 forecast remains the same at 2.5%. A slowdown in business investment has hampered the growth of GDP in the past year. We expect a pickup in investment spending in the year ahead. However, there is a risk that concerns over fiscal drag and slow growth in the global economy could temper investment plans by many businesses. Consumers seem to have settled into a steady 2.0% growth track and are unlikely to create a serious drag on economic growth in the year ahead. But business spending is more of a wild card. Sluggishness in investment spending could curtail GDP growth in the year ahead. Given all the uncertainties that exist regarding both the economys near-term growth prospects and the outlook for fiscal policy, we continue to believe that the FOMC will hold policy steady at its next meeting in September. A decision to taper QE, in our view, is more likely to come at the December FOMC meeting.
Kevin Logan Chief US Economist HSBC Securities (USA) Inc. +1 212 525 3195 kevin.r.logan@us.hsbc.com Ryan Wang Economist HSBC Securities (USA) Inc. +1 212 525 3181 ryan.wang@us.hsbc.com
Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
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Table 1. HSBC US economic forecasts (if changed, previous months forecast in parentheses) ____Actual____ Q1 13 Q2 13 Gross Domestic Product (% quarter annualized) Final Sales to Domestic Purchasers Personal Consumption Business Fixed Investment Residential Construction Government Purchases Net Exports (ppt contribution to GDP) Inventory Change (ppt contribution to GDP) Industrial Production (% quarter annualized) Unemployment Rate (average) GDP Price index (% quarter annualized) Consumer Price Index (% year-on-year) Core Consumer Price Index, (% year-on-year) Federal Budget Balance (FY), USDbn as a % of nominal GDP Current Account Balance, USDbn (average) as a % of nominal GDP
Source: HSBC
__________Projected__________ Q3 13 Q4 13 Q1 14 Q2 14 2.0 (1.9) 2.6 (2.5) 2.3 (2.5) 2.1 2.4 2.2 1.7 5.0 15.0 -0.4 0.3 -0.4 2.6 7.4 2.4 1.7 1.8 2.0 5.9 12.0 -0.4 0.1 0.0 2.1 7.3 1.8 1.7 1.9 2.0 5.5 10.0 -0.8 0.1 0.0 3.1 7.2 1.8 1.8 1.8 2.5 2.4 2.1 5.9 12.0 -0.8 0.1 0.0 3.5 7.0 1.8 2.2 1.9
___Q4/Q4 % change___ 2012 2013 2014 2.0 1.9 (2.0) 2.1 1.7 2.0 5.0 15.5 -1.1 0.3 -0.5 2.8 1.9 2.6 13.2 -1.4 -0.1 0.2 2.4 2.5 2.3 2.1 5.7 11.0 -0.8 0.1 0.0 3.3
_Annual avg % change_ 2012 2013 2014 2.8 1.5 (1.8) 2.4 1.6 2.2 7.3 12.9 -1.0 0.1 0.2 3.6 8.1 1.9 2.7 14.1 -2.0 0.0 -0.1 2.3 7.5 1.5 1.6 1.8 -647 -3.9 -424 -2.5 2.4 2.3 2.0 5.6 11.7 -0.6 0.1 0.0 2.8 7.0 1.8 1.9 1.8 -600 -3.6 -400 -2.3
1.1 0.5 2.3 -4.6 12.5 -4.2 -0.3 0.9 4.3 7.7 1.3 1.7 1.9
1.7 2.0 1.8 4.6 13.4 -0.4 -0.7 0.4 0.5 7.6 0.7 1.4 1.7
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Though the longer-term growth rates were little changed by the revisions, there were some noticeable changes regarding recent growth in economic activity (Figure 1). Quarterly growth rates since the end of the last recession in the second quarter of 2009 are now seen as a bit more volatile, and on average were slightly stronger than then previously measured. The average growth rate from the end of the recession to the first quarter of 2013 is now estimated at 2.2%, compared to 2.1% previously. One can be glad that a bit more output was produced, but this slight increase in measured production does not change our views on the growth of potential GDP or on how much slack currently exists in the economy.
Figure 1. Revised GDP data does little to change the pattern of growth
9.0%
New
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-3.0%
Old
-9.0% 97
Source: BEA
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00
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Figure 3. Core PCE inflation well below the Feds 2.0% target
2.5% Core PCE, YoY%
3.0%
2.0%
2.0%
1.5%
1.0%
1.0%
0.0% 05
Source: BEA
0.5% 06 07 08 09 10 11 12 13 05
Source: BEA
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On top of that, the increase in average stock prices in the past year has led to a strong improvement in household balance sheets, at least in the aggregate. In the first quarter of this year, the value of direct equity holdings and mutual fund shares held by households reached a new peak, finally surpassing the last peak valuation level seen in 2007. All of these developments have probably helped to offset the adverse effects of higher tax rates in the first half of this year. Still, these positive financial developments were not enough to lift the growth of consumer spending to a higher level. Despite modest quarterly gyrations, the trend in consumer spending has not changed very much since the end of the recession in the second quarter of 2009. Since that time, consumer spending has grown at a 2.2% rate and has not shown any sign of accelerating off that subdued pace (see Figure 4).
Figure 4. Consumer spending stuck in a slower growth track compared to pre-crisis trend
11.7
Real personal consumption expenditures, USD trillions
2.9% growth trend from earlier peak 2.2% growth trend from recession end
06
07
08
09
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13
For the year ahead, we expect that consumer spending will stay in a roughly 2.0% growth track, held down by the effect of tax increases, by the reluctance to increase the use of credit, and by slow growth in nominal incomes. The situation will not be helped by the ongoing fiscal contraction by the federal government or by the resulting cutbacks in government jobs.
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Over the past four quarters, GDP has increased only 1.4%, a marked deceleration from the previous years growth rate. The slowdown in business investment spending accounted for about half of the dropoff in GDP growth, or 0.7 percentage points. The slowdown in business spending is somewhat surprising since average profit margins are high, financing costs are low, and average stock prices have been rising strongly for the past year. However, the growth in business profits has slowed. The BEAs measure of economy-side corporate profits increased only 2.1% in the year through Q1 2013. Thats down from a growth rate of 12.8% the year before. Profits are high as a share of national income, but the growth of profits may be stalling out.
Figure 5. Business investment spending surprisingly soft over past year
1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 Business investment spending, contribution to GDP growth, % -2.5 07
Source: BEA
08
09
10
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Business profits and business expectations about the future growth in demand are the key drivers of business investment spending. If businesses start to feel more confident about the future growth of final demand, investment spending may pick up again. We expect a faster pace of business investment spending in the quarters ahead. A recent rebound in new orders for capital equipment points in that direction. Spending on commercial structures such as factories and office buildings is also likely to pick up, we believe, thanks to low long-term interest rates and an increased willingness of banks to lend for commercial property development. Even so, we do not expect an investment boom in the year ahead, just enough to help support a moderate economic expansion at close to the economys trend growth rate. However, there is a risk that concerns over fiscal drag and slow growth in the global economy could temper investment plans by many businesses. Consumers seem to have settled into a steady 2.0% growth track and are unlikely to be a drag on economic growth in the year ahead. But business spending is more of a wild card, and sluggishness in investment spending could curtail GDP growth in the year ahead.
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0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 -0.1 -0.2 -0.3 -0.4 06
Federal government contribution to real GDP growth over the past year, percentage points:
07
08
09
10
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13
These developments have had a significant impact on Department of Defenses (DoD) employment of both military personnel and of civilian workers (Figure 7). The number of active duty military personnel started to fall in the middle of 2011, reflecting the drawdown from overseas operations. Over the past two years, the number of personnel on active duty has declined by about 50,000, to 1.39mn earlier this year. It is worth noting that the Bureau of Labor Statistics does not include military personnel in its estimates of either payroll or household employment. Only civilian employment within the DoD is included. DoD
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civilian employment began to fall in early 2012, as the Department implemented reductions in spending mandated by the Budget Control Act of 2011. After spending limits were cut further by sequestration this year, the DoD instituted hiring freezes and layoffs of temporary workers, resulting in a continued drop in civilian employment.
Figure 7. Job cuts at the Department of Defense are a drag on the overall growth in employment
560
1440
However, the most notable cutbacks in defense spending have not necessarily been reflected in lower employment. According to the BEA, the most pronounced spending cuts have been taken the form of fewer purchases of intermediate goods and services, particularly in maintenance categories such as installation support, weapons support, and personnel support. Most of these items had already seen a reduction in spending over the past two years, again indicative of the drawdown of overseas military operations as well as broader budgetary cuts. But the slowdown accelerated in Q4 2012, probably influenced in part by the imminent threat of sequestration as part of the year-end fiscal cliff. After falling sharply in Q4, the level of intermediate purchases continued to decline in Q1 and Q2.
Figure 8. Large dollar cutbacks in Defense purchases; employee compensation has yet to decline
275 Government expenditures, USDbn (annual rate) 250 225 200 175 150 04 05 06 07
Source: Bureau of Economic Analysis
Defense employee compensation: military plus civilian (left axis) Defense purchases of intermediate goods & services (right axis) 08 09 10 11 12 13
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Ongoing fiscal restraint presents a complication for the Federal Reserve in its assessment of the economy and the appropriate course of monetary policy. Speaking before the National Bureau of Economic Research on 10 July, Mr. Bernanke noted: But there are also some risks which I think are very important for us as policy makers to look at. First, it's still early to say that we have weathered the fiscal restraint. I think it's very difficult to know how long the lags are between congressional decisions and actual spending and production decisions. So, we're going to continue to watch and see whether growth is resilient going forward for the rest of the year Again, our projections are that there'll be some pickup and growth, but that does depend on overcoming the remainder of the fiscal headwinds. Financial markets are once again paying close attention to the latest budgetary developments in Washington. Congress must pass budget legislation by 30 September to avoid a government shutdown associated with a lack of spending authority. Disagreement about potential changes to tax and spending policies has raised the possibility that Congress will be go to the brink once again. At a minimum, a lack of agreement could cause to Congress to resort to short-term, stop-gap measures to avoid a shutdown, as occurred during the spring of 2011. If a budgetary stand-off were to persist into October, fears surrounding the debt limit on federal borrowing would come back into play. The soft deadline for the debt ceiling was reached in May; since then the Treasury Department has relied on extraordinary measures to stay within its borrowing headroom. The hard deadline for borrowing could be reached sometime in October or November, with the exact timing dependent on the pace of Treasury tax receipts. The minutes of recent FOMC meetings indicate that the policymakers at the Fed are inclined to reduce the size of the current program of quantitative easing (QE) from the current USD85bn per month in combined purchases of agency MBS and longer-term US Treasury securities sometime later this year. The timing of that decision will be influenced not only by data on the labor market and the economys overall growth but also by the outlook for further fiscal contraction. The impact of budget sequestration on spending in the current fiscal year (through September) is still uncertain. Furloughs of federal employees, for example, mostly started in July even though the process of sequestration began in March. Direct cuts in federal spending may also intensify in the current quarter. Meanwhile, whether sequestration will continue in the new budget year starting in October is still up in the air. Leaders of both the Democratic and the Republican Parties are currently searching for some compromise that will replace the near-term spending cuts required by sequestration with longer-term cutbacks in entitlement spending. The outcome of those negotiations will have an important bearing on the economys near-term growth prospects, and by implication, on the FOMCs decision regarding when to start tapering the size of the current QE program. Given all the uncertainties that exist regarding the economys near-term growth prospects and also regarding the outlook for fiscal policy, we continue to believe that the FOMC will hold steady at the next policy meeting in September. A decision to taper QE, in our view, is more likely to come at the December FOMC meeting, particularly if our expectation for a pickup in GDP growth in Q4 turns out to be correct.
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Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Kevin Logan and Ryan Wang
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bertrand.j.delgado@us.hsbc.com
stefan.schilbe@hsbc.de
agata.urbanska@hsbcib.com
mathilde.lemoine@hsbc.fr
North America
Kevin Logan Chief US Economist +1 212 525 3195 kevin.r.logan@us.hsbc.com Ryan Wang +1 212 525 3181 David G Watt +1 416 868 8130 ryan.wang@us.hsbc.com david.g.watt@hsbc.ca
melismetiner@hsbc.com.tr
simon.williams@hsbc.com
liz.martins@hsbc.com
Asia Pacific
Qu Hongbin Managing Director, Co-head Asian Economics Research and Chief Economist Greater China +852 2822 2025 hongbinqu@hsbc.com.hk Frederic Neumann Managing Director, Co-head Asian Economics Research +852 2822 4556 fredericneumann@hsbc.com.hk Leif Eskesen Chief Economist, India & ASEAN +65 6658 8962 leifeskesen@hsbc.com.sg Paul Bloxham Chief Economist, Australia and New Zealand +612 9255 2635 paulbloxham@hsbc.com.au Adam Richardson +612 9006 5848 Donna Kwok +852 2996 6621 Trinh Nguyen +852 2996 6975 Ronald Man +852 2996 6743 Sun Junwei +86 10 5999 8234 Sophia Ma +86 10 5999 8232 Su Sian Lim +65 6658 8963 adamrichardson@hsbc.com.au donnahjkwok@hsbc.com.hk trinhdnguyen@hsbc.com.hk ronaldman@hsbc.com.hk junweisun@hsbc.com.cn xiaopingma@hsbc.com.cn susianlim@hsbc.com.sg
Latin America
Andre Loes Chief Economist, Latin America +55 11 3371 8184 andre.a.loes@hsbc.com.br Argentina Javier Finkman Chief Economist, South America ex-Brazil +54 11 4344 8144 javier.finkman@hsbc.com.ar Ramiro D Blazquez Senior Economist +54 11 4348 2616 Jorge Morgenstern Senior Economist +54 11 4130 9229 Brazil Constantin Jancso Senior Economist +55 11 3371 8183 Mexico Sergio Martin Chief Economist +52 55 5721 2164 Central America Lorena Dominguez Economist +52 55 5721 2172
ramiro.blazquez@hsbc.com.ar
jorge.morgenstern@hsbc.com.ar
constantin.c.jancso@hsbc.com.br
sergio.martinm@hsbc.com.mx
lorena.dominguez@hsbc.com.mx