The US – “A Touch & Go Slowdown”, Policy Moderation Likely

In the last one week there have been a number of data points to gain some inferences from mainly on the US and Europe. The US GDP growth for Q4 of 2022 came in at 2.90%. This is well above the consensus of 2.50% and surprising on the higher side, though not significantly. The Q3 growth was at 3.20% but the number is lower this time but quite robust.

The contributory factors to GDP growth have been inventory building, gains in net imports, and government spending. On these three contributory factors the inventory buildup is actually because of slowdown in business. It is not the result of business planning. Imports have come down because of slowing demand factors. Government spending is aimed at propping up demand. In these variables one can see the challenges to future growth however transitory it may be. The last durable goods numbers was strong. It was 5.60% on a m-o-m basis. This was against an expectation of less than half of this growth. This number reflects a large order received by Boeing which if removed from the calculation, the durable goods growth is flat.

The recent numbers indicate US consumer spending is slowing down gradually. This could be the result of persistently high prices as they say high inflation is its own cure. It could also be the result of the hard money policy gradually pulling down consumption spending. In the last three months the m-o-m spending has shown a growth of +0.40% in Oct, -0.20% in Nov, and -0.30 % in Dec, 2022. The numbers display a systematic fall that may likely accelerate further into the coming months. The price impact is visible in the Core Personal Consumption Expenditure too, which was at 4.40% for Dec,22, as against a Fed projection of 4.80%. At this rate the Core is likely to move down to 3.00% during the next two quarters. Few businesses expect that they will be able to raise prices in the coming months. Therefore, the outlook for the price level is one of further gains towards the Fed’s target levels.

The US Inflation reduction Act 2022 is a piece of legislation which will have a favourable impact on inflation. The very objective of the legislation is to contain inflation, reduce the fiscal deficit, control the prices of essential drugs and to put more investments into the energy sector, the size of the plan is to the tune of US$ 738 billion. This is estimated to have an impact in preventing serious recessionary conditions in future. While there are differing views on the actual impact, it is only reasonable to expect some amount of inflation reduction and anti-recessionary benefits emanating from such a massive program.

Interestingly, despite the severe energy crisis, industrial production in the Eurozone remains positive with the last growth figure at 1.90%. This is a good indicator for the level of economic activity in the manufacturing sectors because it looks like the severe energy crisis has not affected the economies to the extent it was expected. If one looks at data more closely it shows that those sectors which are extremely energy intensive have had pains. Sectors like automobiles, computers, electronics, pharma, food products etc. are holding quite well. The post pandemic resurgence in economic activity too is helping business and industry.

Where does this place the future trajectory of monetary actions? The Fed may go in for smaller quantum of hikes and may moderate the hard money policy as we pass by the first half of 2023. There is virtually no room for any major rate hikes. But the Fed may pursue the stability objective till the end of this year. This will have direct consequences for domestic policy making too. But as far as domestic interest rates go, the critical factor is the size of the primary issues that are likely to hit the markets in the next financial year.

Leave a Reply