INSIGHT: US economy could recover in 2014 - or falter further

07 June 2013 16:50  [Source: ICIS news]

By Joe Kamalick

A downturn in US exports could chill recovery in 2014WASHINGTON (ICIS)--The US economy may be poised for a stronger recovery and near-normal gross domestic product (GDP) growth in 2014 - or, depending on whose crystal ball is consulted, it could be troubled by tepid trade winds.

US economic growth will be restrained this year but should gather strength at year end and ramp up to near-normal expansion rates during 2014, according to a major manufacturing group.

In its quarterly economic outlook, the Manufacturers Alliance for Productivity and Innovation (MAPI) said that it expects US GDP growth will be only 1.8% for this year but then increase to a 2.8% pace for full-year 2014.

In normal economic times, the US would be expected to have annual GDP growth rates of 3-3.5%.

“US economic growth will be somewhat restrained but not deterred,” MAPI chief economist Daniel Meckstroth said, “and improving fundamentals provide reason for optimism by the end of 2013 and through 2014.”

“There are a number of reasons for an improved outlook,” he said.

“Consumer deleveraging is close to an end and households have the capacity to use more credit,” he said.

In particular, “housing prices are rising, and with that change comes a virtuous cycle of increasing wealth, consumption and income that feeds back into more housing activity”, he added.

“Pent-up demand is releasing postponed spending for consumer durable goods, and the job market is repairing itself - employment growth is more balanced among the various sectors,” Meckstroth said.

Significantly, said MAPI, US GDP growth this year and next will be impeded by negative net exports - with the US importing more foreign goods than it sells abroad.

And that’s where economic prospects for Europe and Asia come into play.

US export trade has been a stalwart engine in the nation’s recovery since the end of the Great Recession in June 2009, but even that shining star of economic sustainability could be dimmed.

For according to the head of the International Monetary Fund (IMF), the global economy may be entering a “soft patch” with slowing growth in China along with full-year recession and rising unemployment in the European Union.

In a speech to a Washington, DC, think tank this week, IMF managing director Christine Lagarde said that the “fragile and uneven recovery” she predicted just a month ago for the global economy is now threatened by “more sombre trends”.

“Recent data, for example, suggest some slowdown in growth,” she told economists at the Brookings Institution. “At the same time, the downside risks to growth remain as prominent as ever.”

“In the past few months, we see signs of slowing momentum in some emerging markets,” she said. “In China, recent activity has been weak and growth remains too reliant on credit, property investment and infrastructure.”

In addition, she said, “Investment prospects also look less bright in key markets such as Brazil, India, Russia and South Africa.”

Lagarde said that the eurozone economy “is still stuck in low gear”.

She said that business activity in the euro area “has continued to shrink in the beginning of this year, and we expect negative growth - of -0.3% - for the year as a whole”.

“Overall, the region is operating at zero speed,” Lagarde said.

The EU situation is not likely to improve anytime soon, she added.

“Going forward, the indicators are not encouraging,” she said. “Lending to firms is rising only gradually in countries like Germany, and not at all in countries like Italy or Spain.”

She noted that European unemployment rates are still rising, and that weakness, combined with lingering uncertainty over the eurozone growth outlook, “is draining momentum even from countries like Germany and France”.

Germany and France have been the principal economic engines in Europe over the last several years.

Lagarde said that the US economy has made a lot of progress in a short term, largely because of “a steady increase in private demand, driven by a recovery in the housing sector and in the automobile industry and easing financial conditions”.

She said that the IMF is forecasting US GDP growth for full-year 2013 will be “almost 2%”, which is more or less in line with the MAPI prediction of 1.8% expansion.

But even that modest and below-trend growth rate could be an unreachable goal if the US manufacturing sector - the nation’s principal export engine - should falter.

Just such a stumble was suggested this week when a key survey indicated that the US manufacturing sector slipped into contraction in May, with new orders, output and exports in decline across many of the nation’s production industries.

In its monthly purchasing managers index (PMI), the Institute for Supply Management (ISM) said that the index fell to 49% in May, a decline of 1.7 percentage points from the April measure of 50.7%.

May’s downturn in the PMI followed two successive months of weakening numbers for the manufacturing sector, according to the ISM data.

From its most recent high of 54.2% in February this year, the index dropped sharply to 51.3% in March and then slipped further toward contraction in April with a barely positive reading of 50.7%.

The PMI is a composite of supplier responses to the ISM’s monthly survey of 10 different business performance measures in 18 major manufacturing sectors.

A PMI reading above 50% indicates the US manufacturing sector is expanding, while an index measure below 50% means production is contracting.

Bradley Holcomb, chairman of the ISM survey committee, noted that May’s decline in the PMI marks the second such contraction in the US manufacturing sector since the end of the recession in June 2009. 

The last contraction was in November last year when the PMI edged down to below the midpoint with a reading of 49.9%.

The May downturn was driven by a variety of negative readings in PMI subsidiary measures.

New orders for manufactured goods fell by 3.5 percentage points in May, production was off by nearly 5 points, exports fell by 3 points and employment was narrowly lower last month by 0.1 point.

The backlog of orders also was down in May, dropping by 5 points, the ISM said.  With new orders in decline, manufacturers’ inventories rose by 2.5 percentage points.

The decline in manufacturing activity was most pronounced, ISM said, in six industries, including chemicals and the combined category of plastics and rubber products. Ten other sectors reported some expansion in the month, and two others were flat for the period.

Holcomb said that comments from survey respondents “indicate a flattening or softening in demand due to a sluggish economy, both domestically and globally”.

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy
Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog

By: Joe Kamalick
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