US Consumer Slowdown in Early 2013

Consensus Forecasts

Latest data confirm that a consumer-led slowdown may be underway in the US, triggered in part by the spate of Federal tax increases introduced on January 1, 2013. The second release of the Q4 national accounts showed personal consumption picking up from a 1.6% (q-o-q annualized) advance in Q3 to 2.1% growth as bonuses and dividends were paid to recipients ahead of the looming “fiscal cliff.” Indeed, real disposable personal income soared by 2.7% (m-o-m) in December on the back of the pay-out windfall at the end of 2012. January saw payback, though, in the form of a 4.0% (m-o-m) drop in disposable income as the payroll tax holiday came to an end, while real personal consumption recorded another muted +0.1% showing that month. Elsewhere, retail sales in January were soft, down from 0.5% growth (m-o-m) in December to 0.1%, as the US consumer scaled back purchases. On the upside, the housing sector has been reporting strength following five years of sharp retrenchment. New home sales were on the increase in January, soaring by 15.6% (m-o-m) after a 3.8% drop in the previous month, and house prices at the end of last year rose. The past few months have been marked by US stock market strength, a strong dollar and the rise in both home and asset values, all factors which could buoy higher-income spending. Lower-wage households, by contrast, have been hampered by payroll tax hikes and higher gasoline prices. Consumer sentiment did rebound in February after January’s drop, but the index remains below the levels reported in October and November last year. Moreover, despite the recovery in asset prices, consumption is not expected to hold firm in the wake of softer economic activity. In spite of a solid 221,000 gain in payrolls in February, our panel is predicting a rather modest 1.8% increase in consumption growth this year, unchanged from the consensus forecast last month and in line with last year’s 1.9% outturn. For one thing, March 1 saw sequestered public spending cuts come into effect (in addition to defense cuts imposed late last year). January’s 4.9% (m-o-m) drop in durable goods orders and a 2% fall in total factory goods came on the back of a collapse in transportation purchases as defense procurement was scaled back severely, making a dent in the order books of manufacturers like Boeing. US exporters are unlikely to welcome news of the US dollar’s recent gains and the possibility of China undershooting its official growth target this year. The trade deficit widened to US$184.5bn in January on the back of declines in sales to Europe and the Far East as well as a 12.3% (m-o-m) jump in oil imports. In spite of this, February’s forward-looking ISM survey for both manufacturing and service sectors point to gains in the headline index, with noteworthy improvement for the new orders indicators adding a positive gleam to the outlook for US industry. The 2013 industrial production consensus has been upgraded from 2.3% last month to 2.5%.

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