Macro – US outlook
13 June 2022
By Henk Potts, London UK, Market Strategist EMEA
Despite being buffeted by soaring prices, the economic effects of the war in Ukraine, and persisting supply-chain troubles, America’s economy seems to be weathering these pressures on growth better than other developed countries.
The US economy continues to be resilient in the face of weakening external demand, inflation at multi-decade highs, tightening financial conditions, and challenges to the global supply chain. While growth unexpectedly contracted in the first three months of the year, the underlying picture of the world’s largest economy still looks assured, as household consumption remains robust and labour markets improve.
At first glance, the advanced estimate of first-quarter (Q1) US gross domestic product (GDP) was much weaker than expected. In fact, activity declined by 1.4% on an annualised rate. This was significantly lower than the 6.9% growth recorded in the fourth quarter of 2021, and was the first drop in output seen since mid-2020, when COVID-19 restrictions decimated activity.
Nevertheless, many economists dismissed the report as an indicator of an imminent recession, given the contraction was primarily driven by weaker trade and a slower inventory build. Reduced external demand, due to moderating growth elsewhere, led to a 5.9% decline in exports from the US.
Concerns over supply shortages, due to disruption in China and the war in Ukraine, encouraged companies to front-load imports, resulting in a widening of the trade deficit. Inventory data tend to be volatile. After a strong build in the fourth quarter, companies appeared cautious to increase their stock further in Q1.
Domestic activity remained positive this year, robust personal consumption, encouraging growth in business investment, and stronger housing investment.
Personal-consumption expenditures (PCE), accounting for more than two-thirds of economic activity, rose 1.1% month-on-month (m/m) in March. Even after adjusting for inflation, real personal spending was positive, at 0.2% m/m. The acceleration in spending was driven by higher demand for goods and services.
In service spending, momentum has picked as US COVID-19 caseloads decline, encouraging people to travel, dine out, and to stay in hotels more. More spending was also seen in healthcare, recreation, and transportations services.
The outlook for consumer spending remains underpinned by healthy labour markets, excess savings, and a decrease in saving rates.
US unemployment has fallen to 3.6%, a rate last seen in February 20201, and represents a remarkable improvement on 14.7% peak registered in April 2020, early in the pandemic (see chart). Non-farm payroll data shows that America’s economy has created more than 390,000 jobs per month over the past year. Average hourly earnings rose 5.2% y/y in May, helping to offset the attriti on in household purchasing power.
The major disappointment in the labour reports continues to be the slow recovery in the supply of jobs. While the participation rate improved to 62.3% in May, it is still below the pre-pandemic level of 63.4%2.
With spending outpacing income gains, it is clear that consumers feel confident enough to dip into the extra funds built up during the course of the pandemic. In April, the savings rate dropped to 4.4%, comfortably below pre-pandemic levels3. With excess saving of around $2.5 trillion and only a moderate pace of erosion, we expect private consumption to grow at 3% this year and be supportive of growth.
Business investment is also an important contributor to growth. New orders for capital goods rose by a larger-than-expected amount at the end of the first quarter, following a decline in February. In an effort to boost productivity and offset labour shortages, higher energy costs, and supply-chain disruption, companies are turning to machinery. Strong demand for communications and electrical equipment, was confirmed by robust increases in durable goods orders.
We expect gross private investment (a measure of the amount a company will invest domestically) to accelerate in the second half of the year and average 9% in 2022.
US home prices continued to surge in the first quarter of the year. The Case-Shiller US Home price index rose 20.6% y/y in May. All 20 major cities reported robust growth, led by those in the south and southeast4. Investment in housing remains strong, with the number of homes that began construction (housing starts) jumping by 3.9% y/y in March, driven by growth in the multi-family segment5.
While a shortage of materials and skilled labour may hold back momentum in the short term, the fundamentals for US housing remain stable, despite increasing concerns over higher interest rates and affordability. Buyers’ balance sheets seem healthy, labour is slowly returning, and post-pandemic changes expected in living arrangements should continue to be positive for the sector.
Hopes that US in inflation had peaked in March were shattered after the consumer price index (CPI) surged to 8.6% in May, its fastest pace since 1981, driven by the rising cost of fuel, food, and shelter as a result of the war in Ukraine and the reopening of the economy.
Energy prices jumped 34.6% from a year earlier, which was the most since 2005, while grocery prices rose 11.9% over the same period, the fastest rate of increase since 1979. The only respite for policymakers was a moderation in the core inflation reading.
While we have raised our US annual inflation projection for this year to 7.7%, we anticipate that price pressures will begin to ease into year end, driven by base effects, a gradual reopening in China, and the unwinding of core goods inflation (see table).
We forecast that CPI will decline to 6% at year-end, and will then trend lower next year to average 2.7%.
|
2021 |
2022F |
2023F |
|
|---|---|---|---|
|
GDP growth |
5.7 |
3 |
1.7 |
|
CPI inflation |
4.7 |
7.7 |
2.7 |
|
Unemployment rate |
5.4 |
3.6 |
3.7 |
|
Gross public debt (% of GDP) |
128.8 |
124.6 |
123.7 |
|
Private consumption |
7.9 |
3.1 |
1.7 |
Source: Barclays Research, Barclays Private Bank, May 2022
With the number of unemployed heading back towards pre-pandemic lows and sky-high inflation, it is unsurprising that the US Federal Reserve increased the intensity of its policy normalisation timetable.
After ramping up the pace of rate hikes to 50 basis points (bp) in May, we expect similar increases at the June and July meetings. After which, weaker price pressure should allow the Federal Open Markets Committee to revert back to increases of 25bp at the remaining meetings through January 2023. This would put the terminal rate for the tightening cycle at 2.75-3%.
The Fed also announced that they will begin the balance sheet run-off process in June. The central bank will allow its holdings of Treasuries and mortgage-backed securities to decline at a pace of $47 billion per month, rising to $95 billion by September. The upgraded pace of policy tightening suggests that committee members will wait for tangible evidence that inflation is under control and starting to decline before relaxing its tightening narrative.
The growth profile for the US economy remains intact, despite the broad range of global economic pressures and the impact of higher interest rates. Given the improving outlook in respect of COVID-19, strength in labour markets, and positive consumer spending, we anticipate that the economy will grow at 3% this year before easing to 1.7% in 2023.
This month we take a look at the major trends at play in the financial markets and the implications of surging inflation, central bank rate tightening, and slowing economic growth prospects. We also look at how private markets might be needed to bolster diversification, and what investors can do to limit the effect of what may continue to be a volatile end to the year.
