US economy: spring forward or fall back?

Peter Warburton - 03 May 2017

Abstracting from the policy proposals of the Trump administration, whose shape may not become clear for several more months and whose impact is unlikely to be visible until 2018 at the earliest, it is important to consider the plausible direction of the US economy over the next 12 months. Will the US economy spring forward or fall back? The advance estimate (0.7%) of Q1 annualised GDP growth contains some sobering messages for growth optimists.The longed-for and hoped-for acceleration in fixed investment remains elusive. Despite some impressive survey readings for corporate investment intentions, there is scant evidence that broad-based business optimism is translating into faster equipment spending. Residential investment reflects the upward drift of 30-year mortgage rates and non-residential investment is lacklustre outside IT and software. The over-reliance on personal consumption as a source of economic growth is a feature of Anglo-Saxon economies. It derives, significantly, from structural differences in the terms and extent ofaccess of individuals to affordable credit. Over the past 4 or 5 years, near-zero policy interest rates have permeated the structure of US personal interest rates, encompassing bank loans, revolving credit and auto loans. In the case of auto loans, the typical term has also been extended, enabling US consumers to drive newer and larger vehicles than would be feasible otherwise. A de facto tightening of US household credit conditions, aggravated by cash-flow pressures from recovering gasoline prices and softer-than-expected wage data, suggests that US consumers face stronger headwinds than tailwinds in 2017-18. In societies where revolving credit (rather than bank or saving institution deposits) is used as a buffer between current spending and current income, tightening credit conditions can have an abrupt effect on expenditures. Meanwhile, government spending offers only a neutral growth contribution and net exports remain a modest drag on real GDP growth. Inventory change is tilting to a growth contribution, but surveys suggest that industrial inventories are well balanced. In summary, the prospective loss of consumer momentum is likely to overshadow other influences to carry GDP growth into the 1 per cent to 2 per cent range over the coming year. This may well give the US Fed pause for thought in June.

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