United States: Spring thaw should give way to a summer surge

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United States: Spring thaw should give way to a summer surge

United States: Spring thaw should give way to a summer surge

Global Economic Outlook, Q2 2014

With fiscal fights put on hold for a year, the US economy finally has the breathing room it needs to get firmly back on its feet.

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With fiscal fights put on hold for a year, the US economy finally has the breathing room it needs to get firmly back on its feet.

Since the recession officially ended in mid-2009, the US economy has experienced only moderate growth. The reasons for this are many, including the causes, depth, and duration of the downturn followed by repeated confrontations between the Administration and the Congress that shook business and consumer confidence. However, with more people getting back to work and the excess housing inventories gradually coming down, the United States should see a resurgence of its usual drivers of growth: personal consumption and investment. In addition, the US economy could see an additional bump in growth from an unusual quarter—its international trade position.

A slowly normalizing economy

Figure 1 illustrates a US economy making slow but steady progress toward normalizing. Although relatively consistent, personal consumption has made less of a contribution to GDP growth in the four calendar years since the end of the last recession than was typical during the last expansion: an average of 1.5 percentage points during 2010–2013 as compared to an average of 2.0 percentage points during 2002–2007. This is consistent with the relatively slow pace of job creation over the period. Only now, as we approach the fifth anniversary of the end of the recession, are employment levels approaching their prerecession peaks. Given a growing population, this translates into more people remaining unemployed or dropping out of the workforce altogether—factors that would cause a drag on the growth in personal consumption expenditures.

Figure 1. Decomposition of US GDP

Investment was one of the categories hit hardest by the recession. In 2009, it subtracted 3.5 percentage points from GDP growth. The three primary categories of gross private domestic investment are two categories of fixed investment, residential and business, and changes in inventories. The downturn hit the residential market first and hardest (see figure 2) as the housing bubble burst under the weight of inflated housing prices supported by subprime mortgages and negative to no equity positions on the part of too many borrowers. Because of the time it has taken to work off of the excess inventory bloated by foreclosed properties, it has only been in the last two years that we have seen investment pick up in this sector. After a severe contraction in 2009, business investment has also been slow to recover. Through 2013, businesses have held back on scaling up investment in buildings, equipment, and intellectual property even though many have very strong cash positions because of uncertainty about future demand. Private inventories relative to sales have returned to the low levels of the mid-2000s.

US Figure 2

With housing imbalances greatly lessened and individual and business balance sheets in better shape, we should see the reemergence of a stronger “virtuous cycle” of more jobs, more spending, more investment, leading to still more jobs…and so on.

Although neutral in 2010, reductions in government spending have been a drag on economic growth over the last three years (see figure 1) as deficit reduction moved ahead of economic stimulus as the political priority. However, there is little doubt that government actions and inactions including fiscal cliffs, debt ceiling standoffs, and government shutdowns (threatened and actual) have had additional negative impact on personal consumption and investment by shaking confidence.

US trade: A new era?

For most of the past 20 years, imports have subtracted more from GDP than exports have added. While exports and imports both tend to contract during recessions, the size of the contraction was particularly large in the last recession, with imports falling sooner and more quickly than exports as the United States’ growth began to slow before most of our major trading partners (see figure 3).

US Figure 3

Since the conclusion of the recession, a new pattern appears to be emerging. Over the last three years, exports have grown faster than imports in real terms—sufficiently faster for exports to add more to GDP than imports subtract, even with the dollar amount of exports being smaller (exports are approximately 80 percent as large as imports). This resulted in trade being a net positive for the US economy in this most recent period.

However, figure 3 also shows that the growth of both imports and exports has slowed in recent years. So the question is “will US export growth continue to surpass US import growth in coming years if growth of both picks up?” There are some reasons to think the answer to this question may be yes.

A slowing of imports is often a sign of slowing overall growth. After all, the imports get distributed throughout the economy as personal consumption, business investment, inventories, and even combined with other inputs and sent back out of the country as exports. The major categories of imports are shown in figure 4 and each of these categories, in general, has grown more slowly during recent years than they did during the prior expansion. As growth in personal consumption and investment pick up, it would be expected that imports in categories such as capital equipment, consumer goods, and industrial supplies also rise—with one important exception: petroleum and other energy imports.

US Figure 4

As shown in figure 5, the decline in petroleum imports has been an offsetting factor to growth in other types of imports in the last three years. In 2013, the decline in petroleum imports kept the growth of imports 80 percent lower than it otherwise would have been. This decline reflects the substantial increase the United States has experienced in domestic production. According to the Energy Information Agency (EIA) of the US Department of Energy, “the share of total US liquid fuels consumption met by net imports peaked at more than 60 percent in 2005 and fell to an average of 33 percent in 2013. EIA expects the net import share to decline to 25 percent in 2015, which would be the lowest level since 1971.”1

US Figure 5

EIA further notes that liquefied natural gas (LNG) imports, a component of industrial supplies not broken out separately in figure 4, have also declined over the past several years as growing domestic production has displaced some pipeline imports from Canada.2

Growing energy production is also improving the US export position. LNG pipeline exports to Mexico have been increasing. Over the longer term, EIA’s Annual Energy Outlook 2014 projects the United States will be a net exporter of natural gas beginning in 2018.3 Coal is also an important US energy export, and it has hovered at near-record levels over the last four years.4

However, beyond energy being a trade bright spot going forward, the United States should expect stronger export growth as its trading partners’ strength improves. For example, the European Union (EU) is the United States’ largest export market, accounting for over 20 percent of total US exports. Between 2011 and 2013, the European Union as a whole had slipped back into recession, with negative to very low rates of growth. As a result, US exports to the European Union underperformed the US world average. With the return of stronger growth to the European Union, and other trading partners, the United States should expect a concurrent rise in exports.

Table 1 shows another interesting feature of the post-recession world: the growing importance of trade in services. Although smaller in size, trade in services is growing more rapidly and appears to be more resilient in the face as economic downturns, as illustrated by the comparatively stronger growth in US services exports to the European Union. Over the last three years, services exports have accounted for just over 30 percent of total export growth on average.

Table 1. US exports to the EU

2011 2012 2013 2012 2013
Billions of US $ Annual percent change
European Union (28) GDP growth rate -0.4% 0.1%
Exports of goods and services to the EU 469 470 476 0.2% 1.2%
Goods 273 269 266 -1.3% -1.5%
Services 196 200 210 2.2% 4.9%
Total US exports
Goods and services 2,113 2,211 2,271 4.6% 2.8%
Goods 1,496 1,561 1,590 4.4% 1.8%
Services 617 649 682 5.2% 5.0%

Source: Eurostat and the Bureau of Economic Analysis, US Department of Commerce.

The evolving Fed stance

As prospects for US growth continue to improve, the challenge for the new Federal Reserve Board Chair, Janet Yellen, will be how to continue to transition the Fed to a more traditional stance—by tapering asset purchases and eventually moving interest rates to more normal levels—without causing the economy to revert to a slow growth path.

The Federal Open Market Committee (FOMC) noted in its March statement that, “growth in economic activity slowed during the winter months, in part reflecting adverse weather conditions.” However, the economy remains on track for moderate growth, and the labor market continues to improve.5 Reflecting this view, the FOMC decided to continue to taper its program of asset purchases another $10 billion to $55 billion per month ($25 billion per month in mortgage-backed securities and $30 billion per month in longer-term Treasury securities). This will be the third reduction in this round of the Fed’s program of quantitative easing. If conditions remain favorable, the FOMC will continue to taper, with the end of the purchases expected in late 2014. The question then turns to when the Fed will begin to move interest rates higher.

In prior discussions, the FOMC pointed to an unemployment rate of 6.5 percent as a possible signal that the economy was strong enough for rates to move above the 0–0.25 percent target for the federal funds rate. Chairman Bernanke was clear that this unemployment rate was not a trigger that would cause the Fed to act. With unemployment nearing the 6.5 percent mark, in March, the FOMC (as expected) moved further away from the unemployment rate as a primary focus, stating that they would “take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.”6 The FOMC further stated that they fully expect the current target range to stay in place for a “considerable time” after the asset purchase program ends.

With the Fed continuing its accommodative stance, the improvements in fundamentals of the US economy, aided by a stronger trade position, has the United States positioned for stronger growth going forward.

With the Fed continuing its accommodative stance, the improvements in fundamentals of the US economy, aided by a stronger trade position, has the United States positioned for stronger growth going forward. And with the Congress and Administration having already agreed to overall spending levels for the fiscal year that begins on October 1, 2014 and suspending the debt ceiling until March 2015, it is unlikely that there will be a major fiscal bump in the road to constrain progress.

 

Endnotes

View all endnotes
  1. US Department of Energy, Energy Information Agency, “Short-term energy outlook,” p. 6, March 11, 2014, http://www.eia.gov/forecasts/steo/pdf/steo_full.pdf.
  2. Ibid, p. 7.
  3. Ibid.
  4. Ibid, p. 8.
  5. Board of Governors of the Federal Reserve System, press release, March 19, 2014, http://www.federalreserve.gov/newsevents/press/monetary/20140319a.htm.
  6. Ibid.

About The Author

Dr. Patricia Buckley

Dr. Patricia Buckley is director of Economic Policy and Analysis at Deloitte Research, Deloitte Services LP.

United States: Spring thaw should give way to a summer surge
Cover Image by Jessica McCourt (Cover), Maria Corte Maidagan (United States)