US: Fallout from Fed’s Tapering Announcement

Consensus Forecasts

An uneven few weeks for US economic data was capped by heightened market volatility in reaction to the Fed’s comments about tapering the pace of its US$85bn monthly bond purchases (which support liquidity in the financial system). The asset markets responded negatively in the form of mass sell-offs while long-term interest rates increased noticeably. With economic activity still somewhat rocky, the worry is that high rates will choke off growth. So far, the Fed is only talking about slowing the pace of quantitative easing and not an outright return to normalized interest rate moves. However, the uncertainty has added another dimension to the third (and final) release of the Q1 national accounts. GDP now looks to have advanced by a markedly downgraded 1.8% (q-o-q annualized), from an initial 2.4% figure. Personal consumption was also revised down, from 3.4% to 2.6%, and business investment dropped from an initial 2.2% outturn to only +0.4%. January’s tax rises had a definite impact on corporates and households, and this has pulled down 2013 forecasts for GDP, consumption and investment.

The Fed still expects the economy to pick up in the latter half of 2013, though. May’s factory goods release – which showed new orders expanding by 2.1% (m-o-m) following April’s 1.3% gain – presented a positive picture for industry after months of difficulty. Industrial production in May was still disappointingly flat after a 0.4% contraction in April, but factory goods demand was supported by domestic sales. Moreover, June’s ISM manufacturing survey pulled the sector back into positive territory as a result of gains in output and new orders (helped once by domestic demand). However, production expectations have fallen again this month.

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