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It is hard to gain a clear picture of the current state of the US economy, according to QNB Group. While some recent data releases have been disappointing, a closer look suggests any soft patch could be temporary with the recovery expected to gain further traction later this year.
The latest real GDP growth data, released at the end of January, showed an annualised contraction of 0.1% for the final quarter of 2012. This was the first quarterly decline in real GDP since Q2 2009. The poor performance was mainly put down to transitory factors such as a reversal in business inventories, a 22% drop in federal defence spending and weather-related disruptions, mainly from hurricane Sandy. The IMF expects full-year growth of 2.0% in 2013 (compared with 2.3% in 2012), picking up to 3.0% in 2014.
In the labour market, job creation picked up in the second half of 2012 with 87,000 non-farm jobs created in June 2012 rising to 247,000 in November, but, this rate slowed to 157,000 in January 2013. The latest weekly initial jobless claims report also pointed to weakening jobs growth with first-time claimants rising by 12% to 368,000 in January. As a result, the unemployment rate has trended down from an October 2009 peak of 10.0% to 7.8% in September 2012. However, it ticked up again slightly to 7.9% in January.
Despite these weak data releases, US equity benchmarks are at 5-year highs and not far from all-time highs. Some investor optimism may be attributable to a recovering US housing sector, according to QNB Group. In the year to December 2012, sales of existing homes rose by 13%, sales of new homes by 9% and new housing starts by 37%. Since the financial crisis, a weak housing sector has created concerns about the spending power of the US consumer, the main driver of the economy. A crash in US property values in 2007-08 created a negative wealth effect for consumers, prompting them to cut spending and increase savings. The recovery in the housing sector should reverse this effect as well as create construction jobs and support gains across housing-related sectors such as real estate, trade and manufacturing.
Consumer spending rose at an annualised rate of 2.2% in Q4 2012 up from 1.6% in Q3, a positive for the US consumer. However, the Consumer Confidence Index, a leading indicator for consumer spending, fell sharply from 67 in December 2012 to 59 in January 2013, probably dented by the increase in payroll taxes at the beginning of the year. Going forward, consumers will face a drag from higher taxes. Nonetheless, real disposable income is growing and will be temporarily boosted in Q1 2013 by the acceleration of year-end bonuses and dividends ahead of the January 1st cut-off date when tax increases became effective.
On the corporate side, investment growth was strong in Q4 2012 at an annualised rate of 8.4%. Additionally, the purchasing manager’s index, a lead indicator for manufacturing activity, has risen steadily from 49.9 in November to 53.1 in January (a reading above 50 indicates expansion).
As recent data releases have been unremarkable, the strong equity market can be attributed to lower perceived downside risks. The much discussed “fiscal cliff” has been largely sidestepped through the scaling back of tax hikes and the postponement of most automatic spending cuts until March 1st. Furthermore, the US Congress has agreed to temporarily suspend the debt ceiling until May, alleviating short-term concerns that Federal spending cuts could drive the US economy back into recession.
External factors have also lowered perceived risks for the US economy. Data from China, the second largest world economy, has improved with real GDP growth rebounding to 7.9% in Q4 2012 from 7.4% in Q3, alleviating fears that the country was heading for a sharp slowdown. Sovereign debt tensions within the Eurozone have also eased with sovereign bond yields falling in the countries at the centre of the crisis.
However, from a fundamental longer-term perspective, many global economic risks remain. In Europe, sovereigns are still heavily indebted, economic growth is weak and another year of recession is expected in 2013, and the political response remains slow. This leaves the currency area exposed to the risk that sovereign debt issues could re-emerge. Finally, a sharp slowdown in China remains a risk, especially in connection with its oversupplied and highly indebted property sector.
It is likely that the FOMC, the monetary policy board of the US Federal Reserve, had many of these considerations in mind when it decided to leave policy unchanged at its last meeting at the end of January, maintaining asset purchases (quantitative easing through open market policy) of US$85bn per month and not adjusting interest rates.

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