US makes good progress on road to recovery
However, the economy slowed quite a bit in 2011, with GDP growth averaging just 1.7% last year.
The pace of GDP growth slowed to almost a standstill in the opening half of last year before gradually picking up momentum thereafter. The slowdown was partly due to temporary factors such as bad weather, lower defence spending, the impact of higher oil prices and interruptions to activity caused by the Japanese earthquake. Thus, the expectation was that the economy would regain momentum as these factors abated.
There have been clear signs in the closing months of 2011 and early part of 2012 that the recovery in the US economy is moving on to a much more solid growth path. The clearest evidence of this is in the labour market. Non-farm payrolls rose by an average of 200,000 in the three months to January, having grown by an average of just over 100,000 in the previous six months. Meantime, having been broadly unchanged at around 9% between January and October 2011, the unemployment rate fell steadily in the subsequent three months to 8.3% by January 2012.
New weekly jobless claims have also started to decline again in recent months, falling below 350,000 by mid-February for the first time in almost four years, having been stuck in a 400,000-440,000 range for most of 2011. Leading indicators have also turned upwards.
The manufacturing PMI picked up in December and January, reaching 54.1, its highest level since last June. The PMI for the services sector jumped sharply in January to an 11-month high of 56.8.
Other lead indicators such as the Philly Fed and Empire State surveys have also shown a marked improvement in recent months. There are also indications of a return to life in the housing market. There has been a marked rise in the house builders’ survey since September, with the index hitting a five-year high in February. Housing starts have also picked up in recent months too.
Consumer confidence has also seen a marked rebound in recent months. Auto sales have also picked up strongly over the winter after dipping last summer. Retail sales excluding autos remain solid. Meanwhile, manufacturing output rose by 0.7% in January after a 1.5% gain in December.
Thus, a broad range of indicators are pointing to a strengthening of activity in the US and are suggesting that growth is moving on to a broad-based, solid footing.
There is no expectation, though, that this will lead to an early tightening of monetary policy in the US. The Federal Reserve’s central view is that it is likely it will need to maintain interest rates at exceptionally low levels until late in 2014.
The US economy still faces considerable headwinds, which is why most Fed officials believe that rate hikes are years away.
In particular, fiscal policy is likely to be tightened significantly from 2013 onwards in an effort to bring down the very high budget deficit.
Another concern for the Federal Reserve is the weak state of the labour market.
The high jobless number means that there is a large amount of spare capacity in the economy, which will help keep inflation low. This gives the Fed the scope to maintain its ultra-loose monetary policy stance for a long period of time.
* Oliver Mangan chief bond economist AIB Global Treasury
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