GDP growth was deeply revised downward for the first quarter. The first estimate at the end of April was +0.1% (annual rate). One month later it was revised downward at -1%. For the third estimate the figure is at -2.9%. Such a large adjustment is rarely seen.
Carry over growth for 2014 at the end of the first quarter is just +0.4% now. It implies that 2014 forecasts will be dramatically changed. With the same scenario, for the three remaining quarters, 2014 GDP growth drops from 2.1% initially to 1.6%. The recovery does not look the same with such figures.
The first chart helps to see the deep drop of the first quarter of this year. Is it a break or a temporary movement?
The second chart below shows the main contributions to GDP quarterly growth. I have put the three successive estimates of the first quarter
The blue part is internal demand contribution, the green part is net exports contribution and the red part is change in inventories contribution.
Between the first and the second estimates, the adjustment was mainly on inventories. This was perfect in the scenario of a negative climate shock. Demand was still strong but companies were not able to produce or to restock. Then they reduced their inventories. The story was consistent.
For the third estimate the adjustment is on internal demand and net exports. Exports momentum was lower and imports increased more than expected. But the main point is on internal demand. On the chart we see how it decreased (blue part). Inside internal demand, the dramatic adjustment came from consumption. Investment and government expenditures’ contributions didn’t change too much. Households’ contribution was at 2.05% in the first estimate, 2.10 for the second but just 0.7% for the third. The three components of households expenditures were deeply revised downward (specifically on services, there was a deep drop in healthcare expenditures).
The recovery seen in the US economy was driven by consumption. With the new figures it is no longer the case. The question is the following: is this drop purely temporary or is it permanent? If it is just temporary it is not too problematic, if it is not the story for the US and for the global economy will be different.
In other words, is the climate adverse shock the only explanation of this bad news? In a recent blog Atif Mian and Amir Sufi showed that it could be an explanation for durable goods (see here and here). Or is it a persistent change due to low-income momentum or insufficient deleveraging that could be perceived as a constraint for an extended period. This would say that the budget constraint is stronger and could lead to change in priorities (on healthcare expenditures for example). This would be consistent with the secular stagnation hypothesis discussed recently by Larry Summers (see here)In terms of economic outlook the story would be very different with the two scenarios. This would also have different conclusions for monetary policy. If it is just temporary, then Janet Yellen speech on recovery is still robust and the impact on the Fed’s strategy would be limited (except a new downward revision of their forecasts). If the shock is persistent, the Fed will keep its interest rates low for an extended period, well after the end of asset purchases.
This uncertainty on the economic scenario also highlights Janet Yellen’s will to decide when she wants to change the Fed’s monetary stance. She doesn’t want to be tied by Forward Guidance or by any commitment on a special date.
This situation on monetary policy will create uncertainty and will not drive bonds rates higher.
We will have news on consumption profile this afternoon with May figures. Is there a real rebound or not?
If a weak scenario is expected for the US economy, then the global business cycle is at risks. This could be problematic for a number of emerging countries, but it would be also a drag for the Euro Area. Part of the recovery expected this year in the Euro Area is dependent on the global business cycle boom. If this doesn’t work, the meager growth scenario in the Euro Area is at risk.
This could lead the Bank of England to be less sanguine on its scenario of a rapid increase in its own interest rates. Uncertainty of the global business cycle could be a concern for the UK.
The question now is simple: is the USA still the strong driver of the global recovery? If it is not, which country could take the lead?