One of the most important things we learned over the weekend is that the US economy is strong. GDP rose about 2.5 per cent in the first quarter of 2013, which was below the expected of 3 per cent, so it doesn’t look great with a casual glance. Thing is, 2.5 per cent is actually a good, above-trend result, and even better than that, the figure hides what is in fact much stronger growth momentum.
For a start, consumer spending was up 3.2 per cent, which is the strongest result in two years. Private investment then contributed another half a percentage point or so, which means in effect you have the private demand motoring along at a strong 3.7 per cent annual pace.
The weakness was driven by government spending and in particular military spending. According to the stats, military spending is down some 30 per cent (annualised) over the last two quarters – the biggest drop in spending since the US demobilised after the Korean war. Last quarter’s drop was the single biggest quarter drop since the end of the Vietnam war.
Anyway, this drop took off 0.7 percentage points from growth this quarter – i.e. in the absence of that fall, growth would have been 3.2 per cent – and 1.2 per cent last quarter. It’s knocked off about two percentage points from growth over the last six months.
Most people think of the sequester and generalised fiscal tightening when they see these figures. But the biggest fall in spending in 60 years can’t be blamed on the sequester, which was only to lop off $40 billion in defence spending over the rest of the year, not $60 billion in two quarters. At this pace the military is well on its way to completing all cuts for next year’s budget as well!
Truth is, those spending cuts we’ve seen so far probably reflect timing and other issues (statistical noise) and we’ll see a rebound. The bigger strategic picture is that the US is terrified by China and there is no way they are going to cut spending on defence by a huge margin.
So, what this highlights is that underlying momentum is very strong, because 30 per cent falls in defence spending aren’t sustainable and we’re not going to see military spending detract from growth every quarter. When that stops, all of a sudden GDP outcomes will go from their current trend-like pace to something stronger – and this is where the momentum is, the true picture.
That’s why people shouldn’t be surprised that jobs growth has been so strong, We’re talking average jobs growth of nearly 200,000 per month over the last six months – very strong growth indeed, which marks one of the strongest jobs recoveries on record. On record, people.
We’ll get another update this Friday and there is a lot of excitement over it following the soft jobs number for March of only 88,000. More often than not these soft jobs figures get revised up, and it was only one months’ worth of data anyway – not enough to change a trend, but it was softer and it got everyone talking of the 'Summer slowdown', 'Spring swoon'. Just another softer version of the double dip, really.
In the lead-up to that report it’s likely that markets will be subdued. There isn’t an awful lot of heavy hitting data either here or abroad. Things like German CPI, US incomes and spending, pending home sales on Monday night; then Tuesday, Japanese industrial production, the Reserve bank's private sector credit numbers (1130 AEST), German labour data and eurozone CPI.
Then on Wednesday we see Aussie house prices (1000 AEST) and the Reserve Bank's commodity prices (1630 AEST), while on Thursday, Aussie building approvals and trade prices.
As you can see, none of that is earth shattering. Certainly the ISM manufacturing data (Thursday night) and the FOMC meeting (0400 AEST Thursday morning) have the capacity to swing things, but I’m not expecting a huge move on the ISM.
And really, what can the FOMC say or do that we haven’t heard before? No one is expecting them to print more or really change their language much at this meeting. They’ve already told us the recovery is disappointing and that they stand ready to support growth, dual mandate etc. Whatever. They’ll say whatever they need to say to justify why they need to keep printing and to keep people from thinking that they’re monetising deficits. Which is what they are doing.
Added to that, markets were fairly subdued for the session on Friday and that will also set a weak tone for our market over the next couple of sessions. So despite the positive GDP figures, the S&P500 was down 0.2 per cent, the Dow up 0.1 per cent and the Nasdaq off 0.3 per cent. Commodities were all weaker – gold off $8 to $1453, copper fell 1.7 per cent and crude 0.7 per cent ($93). Our own SPI was off 3 points to 5104.
That’s about it, so I hope you have a good week.
Adam Carr is a leading market economist.
Follow @AdamCarrEcon on Twitter.