Despite the ‘euphoria’ in some commentaries about the strength of the first estimate for US 4th quarter economic growth – an annual rate of 2.9%, down from the 3.2% rate in the September quarter – the data raises a worrisome question: American consumers are keeping the economy growing, can they keep it up?
Growth overall all of 2022 was just 1% (dragged down by the negative first two quarters) and was substantially below the 5.7% in 2021 (which was boosted by ending of most Covid related restrictions).
The GDP report – the first of three estimates – will be considered by the US Federal Reserve at its first 2023 meeting on Tuesday and Wednesday. US market surveys think the Fed will lift rates by another 0.25% at this meeting and then take a break.
That will push the Federal Funds Rate up to a range of 4.50% to 4.75%. A figure of 5% is still seen as the peak for the Fed but there’s enough weakness in the GDP report to support a Fed pause.
The ’negatives’ from the point of view of the Fed remain the still-strong US jobs market and the continuing fall in initial unemployment benefits claims.
These must soon start turning higher as the plethora of job cuts in technology spreads to other areas of the economy. But there remain millions of job vacancies which many of the newly unemployed could access.
US toymaker Hasbro joined the job cutting trend on Thursday, revealing a cut of 15% to its workforce – around 1,000 worldwide – after reporting weak Christmas sales.
That’s another weak retailing report (department store chain Nordstrom also surprised with weak sales figures as well this week).
Economists wonder for how long will the continuing strength of consumer spending support the wider economy.
Consumer spending accounts for about 68% of US GDP and since the pandemic ended, it has been buoyant.
It was solid in the first estimate for the 4th quarter, rising 2.1% for the period which was down slightly from 2.3% in the three months to September.
Moody’s pointed out that consumer spending added 1.4 percentage points, to growth which was just behind the contribution from the rise in inventories.
But can this continue?
Consumers (like those in Australia and elsewhere) face falling real wages and weak real income growth will eventually could stop spending.
And as consumer spending slowed, inventories rose. Now not all of this growth was in retailing and other areas of consumption – its coal, oil, gas etc.
That saw inventories post the largest contribution to growth at 1.5 percentage points after acting as a headwind in preceding quarters.
“This leaves the mix of growth weaker than the top-line suggests,” Moody’s said.
“Final sales of domestic products, which exclude the impact from inventories, rose 1.4%, a material slowdown from the 4.5% gain in the third quarter.”
A 26.7% plunge in residential fixed investment, reflecting the very sharp slide in housing was a drag on the growth number, as did a 1.3% decline in exports. The housing drop subtracted about 1.3 percentage points from the headline GDP number alone (it will be a negative in Australia’s 4th quarter GDP as well).
Despite the slowing in growth, Moody’s reckons the US economy will avoid a recession this year and thinks growth will come in around 2022’s 1%.
“In the face of high and still-rising interest rates and heightened uncertainty. Consumer spending is unlikely to pick up this year, and while there is some hope for better trade prospects if the dollar continues to weaken, it is unlikely to be enough to offset weakness elsewhere.”
Moody’s points out that many business economists and analysts believe there is a recession looking (two thirds it said in a recent survey), although big global investors in the most recent Bank of America investor survey were far less gloomy than they were a month ago, especially about the chances of a recession in the US.
Moody’s points the way jobless benefits claims remain strong. Thursday saw the release of the latest weekly unemployment benefits figures – they again fell – down 6,000 to 186,000, the lowest reading since last April and well below market estimates of just over 200,000.
That’s despite more sackings across the tech sector this month – more than 70,000 this month alone and over 100,000 since before Christmas.
Moody’s said that “jobless claims remain quite low, which along with a historically low unemployment rate, signal ongoing labor market strength.”
“A final reason to suspect that a recession may not be dead ahead is that consumer confidence improved in December, and has risen even further in January, according to the preliminary estimate from the University of Michigan. So far, consumers appear to be keeping the faith thanks to improvements in inflation, lower energy prices, and a still- strong labor market,” Moody’s pointed out.
In many respects the US and Australian economies are in similar situations except there is one big positive in America, a clear and definite slowing in inflation.
The December quarter Consumer Price Index in Australia and the monthly inflation indicator for December both confirm there’s no good news for inflation here.
Both countries have very strong labour markets, low levels of unemployment and under employment, high numbers of job vacancies and falling real wages and household incomes (except for rising interest income).
The only extrapolation to be made from the latest US GDP data and the Australian situation is that both economies are being held up by a very strong labour market whose members are facing a growing drain on their incomes and savings.
Moody’s thinks the US will escape a slump into recession as consumer spending sags – but what about Australia with its more persistent inflation?
