FocusUS economy to see growth in '13 despite Q4 GDP decline - analysts

31 January 2013 00:45  [Source: ICIS news]

US economy to see growth in By Tracy Dang

HOUSTON (ICIS)--Even though a preliminary report on Wednesday showed that the US economy contracted in the fourth quarter of 2012 for the first time since the second quarter of 2009, some economists said the decline was expected and that the US should continue to see modest growth through 2013.

The US Department of Commerce said its first estimate of Q4 gross domestic product (GDP) fell by a slight 0.1% after actual Q3 GDP increased by a strong 3.1%.

The Manufacturers Alliance for Productivity and Innovation (MAPI) said it had expected the decline because of large increases in inventory accumulation and government spending in the third quarter, two surges that could not be repeated in the fourth quarter.

“When you have high inventories in the third quarter, even with decent spending in the fourth quarter, you’re not going to build them anymore - you’re going to reduce them,” said MAPI’s chief economist Daniel Meckstroth.

“GDP measures production,” he said. “There wasn’t production because you’re using already produced goods from the previous quarter. When production gets ahead of spending, it has to be corrected.”

Kevin Swift, chief economist for the American Chemistry Council (ACC), said the organisation knew there would be a period of soft or stagnant growth because of its Chemical Activity Barometer (CAB).

The CAB, which reflects the chemical industry’s early position in the supply chain to provide leads for business cycle peaks and troughs, recorded a 0.3% gain in October, an 0.8% loss in November and a 1.0% increase in December.

Similarly, the National Association of Manufacturers (NAM) said it was not surprised by the GDP contraction because its Fiscal Shock study showed that manufacturers were already reacting negatively to the then-impending fiscal cliff, even before the 1 January 2013 date that the proposedautomatic tax increases and spending cuts were to take effect.

In addition, NAM’s IndustryWeek Survey of Manufacturers for the fourth quarter found that overall optimism declined significantly throughout the year.

“We saw manufacturers pulling back on spending and hiring at the end of last year as they worried about slowing sales and fiscal uncertainties,” NAM said on Wednesday.

The organisation said even though the fiscal cliff has been partially averted, there are no budget solutions over the the US debt ceiling and spending cuts, or “sequester”, which could cost the US economy over 1m jobs.

“While there has been some recent optimism in the markets, the key driver for manufacturers will be when confidence rises and sales consistently pick up,” NAM said.

The Conference Board reported on Wednesday that its Consumer Confidence Index fell further in January after declining in December.

“I think consumers are constrained,” Meckstroth said. “They can spend more if they want to, but because they’re constrained on job growth, they can’t go on a spending spree based on credit.”

Many consumers are dealing with less take-home money this year, as the payroll tax cut Americans enjoyed for the past two years expired on 31 December, raising Social Security taxes each paycheck from 4.2% to 6.2%.

“For the first quarter 2013, we’re looking for about a 1% annual rate of growth,” Meckstroth said. “Without the tax increase, it would have been 2.5% or more.”

Still, Meckstroth said the “very minor negative quarter” does not mean the economy will go into a recession.

“It’s one of these adjustments that normally occur when a strong quarter is followed by a weak quarter,” Meckstroth said. “It just means the economy is constrained. We’re not going to grow rapidly. We’re going to grow modestly.”

The inventory drawdown in the fourth quarter of 2012 will create an imbalance that would need to be corrected, Swift said.

“The drawdown in inventory is good for growth in this quarter because there will be a pick-up in orders, which would translate into an increase in production,” Swift said.

Additionally, the Associated General Contractors of America (AGC) said federal spending cuts will slow down the economy, but other factors will offset the decline.

“Government purchase of goods and services are important to the total output of this country, but I think that will mostly be limited to firms that are dealing and depending directly on government purchases,” said Ken Simonson, AGC’s chief economist.

“I think those effects will be more than offset by growth in the purchases of new homes, business investments and equipment, structures and later in the year, consumer spending,” he added. “There is quite a bit of investment this year in manufacturing, warehouse, transportation and things related to oil and gas.”

The Federal Reserve Board said the US economy has paused in recent months, but it expects growth to resume at a moderate pace.

The Department of Commerce emphasised that the fourth-quarter advance estimate is based on incomplete data and subject to further revision. The second estimate will be released on 28 February.

By: Tracy Dang
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