Economy Bears Turn Bulls Seeing 3% U.S. GDP Few Saw in 2012
Bearish forecasts for the U.S. economy are giving way to more upbeat views of the nation’s ability to weather federal spending cuts and tax increases.
At Morgan Stanley in New York, Chief U.S. Economist Vincent Reinhart now sees a 3 percent pace of growth in the first quarter, up from 0.8 percent in December. JPMorgan Chase & Co.’s Bruce Kasman raised his forecast to 3.3 percent from 1 percent.
“What happened at the beginning of the year was a genuine surprise in terms of how well the economy held up,” Kasman, the firm’s New York-based chief economist, said in an April 5 conference call.
Gross domestic product probably climbed at a 3 percent annualized rate from January through March, according to the median forecast in a Bloomberg survey of 69 economists from April 5 to April 9. That’s up from the 2 percent gain projected last month and 1.6 percent in December.
Consumers overcame a 2 percentage-point increase in the payroll tax and higher gasoline prices to spend at the fastest pace in two years, the survey shows. The pickup, combined with sustained gains in housing and business investment, will help propel the expansion through the worst of the automatic government cuts that are projected to take effect this quarter.
“We are surprised that there wasn’t a bigger and more immediate hit to spending” by consumers, said Reinhart. “There is an underlying momentum in spending, which means that sequestration and the tax increase will only lead to a momentary pause.”
The Bloomberg survey shows the expansion will cool this quarter, to a 1.5 percent pace, then reaccelerate to an average 2.4 percent rate in the last six months of 2013.
Some economists lowered their estimates for first-quarter growth after a Commerce Department report today showed retail sales in March unexpectedly fell by the most in nine months, indicating households ended the first quarter on a softer footing. Barclays reduced its forecast to 3 percent from 3.5 percent.
Stocks fell after the retail-sales data and another report showing consumer sentiment declined in April. The Standard & Poor’s 500 Index slid 0.3 percent to 1,588.79 at 4 p.m. in New York after the gauge closed at a record high yesterday.
Consumer spending, which accounts for 70 percent of the economy, climbed at a 3 percent annualized rate in the first quarter, the best reading since the same period in 2011, according to the Bloomberg survey median. Last month’s survey projected a 1.6 percent advance.
“We feel good about the consumer in 2013,” Karen M. Hoguet, chief financial officer of Macy’s Inc. (M), said in a March 13 investor conference. “Every indication we’re seeing is that he and she are doing fine, still buying.”
The levy used to fund Social Security reverted to 6.2 percent of income this year, the same as in 2010, from 4.2 percent in each of the past two years as part of the agreement to avert the so-called fiscal cliff of tax increases and spending cuts that were to take effect in January. That reduced take-home pay by about $83 a month for anyone earning $50,000 a year.
Buoyed by rising stock and home prices and a surge in income at the end of last year, households responded to the higher taxes by putting less money away in the bank, Kasman said. The saving rate, or the share of disposable income that consumers set aside, plunged to 2.2 percent in January, the lowest since August 2007, from 6.5 percent the prior month, according to figures from the Commerce Department. It improved to 2.6 percent in February.
“The fundamentals do look firmer,” said JPMorgan Chase’s Kasman. “The business sector is looking like it’s healthy.” While he sees growth slowing to 1.5 percent this quarter, he projects it will pick up to 2 percent in the third quarter and to 2.5 percent in the last three months of the year.
Among the improving fundamentals is the country’s growing fuel independence. The U.S. produced 84 percent of its own energy in 2012, the most since 1991, according to data from the Energy Information Administration, the statistical arm of the Energy Department. The measure of self-sufficiency rose to 88 percent in December, the highest since February 1987.
U.S. production of crude oil in the fourth quarter of this year will exceed imports for the first time since 1995, as extraction from shale rock formations in North Dakota and Texas put the nation on track to surpass record output, the EIA projected last month.
Low-cost energy has been a boon for U.S. refiners, who are processing cheaper domestic oil to make fuel to meet rising demand in countries such as Brazil, China and India. Shares of Marathon Petroleum Corp. and Phillips 66 hit records in January after earnings beat estimates. In the first week of March, U.S. exports of products such as gasoline and diesel rose to a record 3.2 million barrels a day, according to EIA data.
Cheap natural gas has also attracted investment in steel making, petrochemicals and fertilizers, such as the $550 million methanol project being built by Methanex Corp. (MX) in Geismar, Louisiana. The fuel has declined 73 percent to $4.139 per million British thermal units since reaching a peak in 2005.
The rebound in housing presents another boost. Builders will break ground on 970,000 houses this year, up from 780,600 in 2012 and the most since 2007, the Bloomberg survey median showed.
The increase in construction is unfolding as property values firm. The median price of an existing house climbed 11.6 percent in the 12 months ended February, the biggest year-over- year advance since November 2005, according to figures from the National Association of Realtors.
“House-price appreciation is creating wealth, as is the run-up in stocks,” said Morgan Stanley’s Reinhart. That is also helping buoy household spending, he said. In addition, “there is a lot of business activity that is tied to housing,” he said, including sales of furniture, appliances and automobiles.
Cars sold at an average 15.3 million annualized rate in the first quarter, the most since the same period in 2008, according to figures from Ward’s Automotive Group.
While the increase in the payroll tax and cuts in government spending are a concern, “everything else seems to be pretty positive,” Kurt McNeil, vice president of U.S. sales and service at Detroit-based General Motors Co. (GM), said on an April 2 conference call. McNeil said gains in employment and housing, the thawing in consumer credit and the increase in stock prices outweighed the negatives.
“I think most Americans are pretty tired of what goes on in Washington, so they’ve started to tune that out a little bit,” McNeil said.
What’s being tuned out is the prospect of $85 billion in across-the-board cuts in planned federal spending that started on March 1. The reductions trim 5 percent from domestic agencies and 8 percent from the Defense Department this fiscal year.
The so-called sequestration will probably shave around 0.75 percentage point from growth in the second and third quarters, according to a forecast by economists at Goldman Sachs Group Inc. in New York.
“Right now, the onus is on the people that think the economy is going to be stuck at 2 percent” for the rest of the year, said Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York. “Really, tell me why? I just don’t get it.”
The U.S. economy managed to grow at about that pace in the first three years of the expansion while housing was contracting, state and local government agencies were cutting spending, households were trimming debt and Europe was in a recession, Dutta said.
Now at least three of those obstacles -- residential real estate, state and local government and households -- are poised to contribute more to growth, he said. In addition, companies will probably begin to spend more freely as concern over the economic outlook dissipates, according to Dutta.
“I think the real surprise is going to come at the end of the year when we realize that the first quarter was not in fact the strongest quarter for the U.S.,” said Dutta.
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