US Quarterly
Group Economics
Macro & Financial Markets Research
Maritza Cabezas, +31 20 343 5618
After a dip consumers to lift US economy
16 March 2015


The US economy has made a slow start this year. Retail sales growth has been noticeably weak. We
think this is temporary and we expect US consumers to lift economic activity in the course of the year.
Meanwhile, the rapid pace of the dollar appreciation is having mixed effects. It will be a drag on US
exports, but household consumption will eventually be further boosted through lower import prices.
Nevertheless, due to the soft data at the start of the year and the more rapid appreciation of the dollar
than we had anticipated, we have adjusted our GDP forecast to 3.2% from 3.8% in 2015.
As employment approaches the Fed’s mandate, it will likely want to see inflation picking up before it
tightens monetary policy. After low core inflation in the coming few months, we expect it to start
moving to the 2% goal towards the end of this year. This prospect is supportive of our expectation that
the Fed will start raising rates in June. A later start cannot be ruled out if soft economic data were to
persist or if inflation were to undersshoot our expectations.
Consumption getting ready for liftoff…1
GDP growth in the second half of 2014 averaged an
annualised pace of 3.6%. In this period, consumer spending
was the main driver (average contribution 2.5 ppts), boosted
mainly by the continuing improvement in the labour market.
Gains in real personal income from lower gasoline prices have
already given an impulse. Indeed, real disposable income
rose 3% at an annual rate in the second half of last year,
roughly double the average recorded in the past five years. As
a result, consumer confidence has been surging to pre-crisis
levels.
Net wealth to boost consumption
% of GDP
Reasons to be confident about US consumers
savings as % disposable income
480
10
460
8
440
420
400
380
Q2 2000
Q2 2007
Q4 2010
Impact on consumption
Credit availability
Up
Household wealth
Up
Labour market recovery/higher real income
Up
6
Strong USD / lower import prices
Up
4
Lower gasoline prices
Up
2
Consumer confidence
Up
0
Q4 2003
Net wealth households
Source: ABN AMRO Group Economics
Q2 2014
Savings rate
Source: Thomson Reuters Datastream
…as conditions for consumers improve
Consumer spending has been weaker than expected in the
first quarter, partly as a result of bad weather. This likely
explains the higher savings rate in the past few months. As
1
consumers realise that the extraordinary income gain from
lower oil prices is more “long lasting”, we expect that
households will favour consumption more decisively and that
the savings rate will fall a bit. On top of this the economic
environment is generally improving for consumers. Capital
gains on equity holdings have sharply raised the wealth of
many households. For home owners, rising house prices has
increased the value of their homes. The strong dollar is
reducing the price of imports, which will gradually be passed to
lower prices on the shelves. Finally, a strong labour market
has already been a positive for consumer spending.
This US Quarterly covers the content of the US section of our
former Global Macro View.
Business investment strong, despite grey clouds
Business capital spending grew strongly in 2014. Investment in
equipment grew 5.4% yoy, while investment in structures grew
7.4% yoy. More recently lower energy prices have started
weighing on business investment in the energy sector. Indeed,
US energy investments are falling quickly, even if it is in the
least productive projects. Our estimates suggest that energy
sector capital spending cuts will represent a drag of around 0.2
ppts of GDP in 2015.
2
After a dip co
onsumers to lifft US economy
y outlook for co
onsumption – 16 March 2015
5
Res
sidential inves
stment a slow
w start in 2015
Housing demand picked up with
h a slower pace
e than expecte d
2
partly as a result of slig
ghtly higher mortgage rates att
in 2014,
the
e end of 2013. M
Meanwhile, the
e supply of hom
mes has been
dec
clining, which h
has slowly put upward
u
pressu
ure on house
pric
ces. This all led
d to a lower housing affordability in the first
half of 2014, whicch partly explains the subdued
d residential
o
2.5% in
investment. Total residential invvestment rose only
14 and it remaiins well below its pre-recessio
on peak. On to
op
201
of this,
t
severe we
eather condition
ns in the North East have
sup
pressed construction growth in
i the first quarrter. But
affo
ordability has b
been improving
g lately. Moreov
ver, we see the
e
hou
using market as being less vu
ulnerable than in the past to
inte
erest rate hikess. Households have been red
ducing their
leverage and havve benefitted fro
om lower mortg
gage rates for a
nsiderable time
e. We don’t exp
pect credit cond
ditions to tighte
en
con
in the
t near future,, as we think th
he Fed rate will increase ratess
only gradually.
Ho
ome affordab
bility has been
n picking up**
‘00
00s
indeex
5.5
22
20
5
20
00
4.5
18
80
4
16
60
3.5
3
14
40
10
11
12
13
14
4
15
Export
E
growth
h slowing as a result of stronger dollarr
3
30
12
20
2
20
90
0
10
0
60
0
-10
30
0
-2
20
Q1
1980
0
Q4
5
1985
Q3
1991
Export volume (lhs)
Q2
Q
1997
Q1
2003
Q4
2
2008
Q3
2014
Trade weighted exchange
e
rate (rhs
s)
So
ource: Thomson Reuters
R
Datastream
m
conomy remains strong, deespite slow sta
art
Ec
Although we hav
ve been seeingg softer data in the first quarte
er,
we
e think that this
s is a temporarry dip. Firms will gradually adjjust
to the stronger dollar and lowerr oil prices, con
nsumers will dig
ove and there
intto their purses as weather coonditions impro
co
ould even be so
ome payback inn the coming months
m
for the
slo
ow start. We ha
ave estimated that the gains in consumption
re
esulting from low
wer oil prices w
will far exceed the drag on
en
nergy related in
nvestments in tthe coming mo
onths, amountin
ng
to around 0.8pptts of GDP, whicch were largely
y priced in our
cted dollar
forecasts. Nonettheless, the fasster than expec
ppreciation will be a drag for tthe economy. The
T strong dolllar
ap
ha
as negative imp
plications for thhe trade balanc
ce and for the
inv
vestments of firms doing bussiness abroad. We have adjussted
ou
ur GDP forecas
st to 3.2% from
m 3.8% in 2015.
D
Demand
- Existiing home sales
s (lhs)
H
Home
affordability (rhs)
Sou
urce: Thomson Re
euters Datastream
m
*Hig
gher values home affordability mean homes more afffordable
port growth slows, stronge
er dollar partly
y to blame
Exp
In the
t fourth quartter, net trade weakened,
w
subtracting a bit
mo
ore than 1 ppt frrom growth. Th
his is partly exp
plained by the
imp
pact of a strong
ger US dollar on
o export growtth. Indeed, the
trad
de weighted va
alue of the US dollar, one of the metrics whiich
com
mpares the excchange rate of a country against that of its
ma
ajor trading parttners has apprreciated by 18%
% in the past
s for US
yea
ar. This represe
ents a loss of competitivenes
c
exp
porting firms. A
According to the
e S&P Dow Jones indices,
abo
out 40% of US firms’ revenue
es come from abroad.
a
Ma
anufacturing acctivity, which acccounts for a la
arge chunk of U
US
exp
ports, has been
n feeling some of the pressure already and
ma
anufacturing surveys have bee
en softer in the
e past few
mo
onths. We expe
ect that some firms will adjust prices at the
cos
st of their own p
profit margins, reducing in thiis way some off
the
e impact of a stronger dollar.
ve to target, sttronger dollarr a downside risk
r
Inflation to mov
One of the major concerns is w
whether the dec
cline in oil price
es
nd a stronger dollar will affectt inflation or even raise the rissks
an
off deflation. CPI has been runnning below the Fed target of 2%,
2
mainly as a result of lower oil pprices. And whiile we expect a
n wage inflationn, in the near term the impact of
grradual pickup in
a stronger dollarr and lower com
mmodity prices
s are likely to
ult,
offfset upward pressure on pricees in the short run. As a resu
we
e expect core inflation to be sstable or slightlly lower in the
co
oming months. Meanwhile, infflation expecta
ations seem to be
les
ss of a concern
n now. These m
measures have
e been picking up
lattely, influenced
d mainly by inccreasing oil pric
ces. FOMC
members have “generally anticcipated that infllation will rise
d the Committeee’s 2 percent objective
o
as the
e
grradually toward
labour market im
mporved furtherr and the transitory effect of
wer energy pric
ces and other ffactors disspita
ated”. All in all, we
low
ex
xpect core infla
ation to increasse gradually in the second ha
alf of
the year, reachin
ng the 2% targeet in 2016. This
s is in line with the
ed’s objective.
Fe
3
After a dip co
onsumers to lifft US economy
y outlook for co
onsumption – 16 March 2015
5
Fed
d’s view: rate hike getting closer
c
The
e discussion off FOMC memb
bers is now cen
ntred on the
app
propriate path ffor monetary policy
p
as labourr market slack iis
dim
minishing and itt is unclear wha
at impact this will
w have on
inflation. Indeed, tthe dispersion of participants projections forr
the
e unemploymen
nt rate is now narrower,
n
while
e that for inflatio
on
rem
mains very wide
e and the mid point
p
forecast was
w recently
adjusted downwa
ard. For most FOMC members, lower inflatio
on
is seen
s
as transito
ory and it shou
uld gradually return to the Fed
d’s
long-term target. Most support raising
r
rates this year. The few
w
me
embers that thin
nk that higher inflation isn’t arround the corne
er
are
e supporting a rrate hike in 201
16. We maintain our view tha
at
the
e Fed will start g
gradually hiking rates from th
he middle this
yea
ar onwards thro
ough most of 2016,
2
but there are downside
risk
ks that this cou
uld be postpone
ed as a result of
o lower inflatio
on
or soft
s economic d
data.
Ke y forecasts for the
t
US econom
my
DP (% qoq, annua
alised)
GD
CP
PI inflation (% yoy
y)
Unemployment rate
e (%)
14Q
Q4
2
2.2
1
1.1
5
5.7
15Q1
2.2
-0.5
5.4
15Q2
3.5
-0.5
5.2
15
5Q3
3.4
-0.2
4.9
15Q4
4.3
0.6
4.7
(
Offficial policy rate (eop)
3M
M interbank rate (e
eop)
10Y
Y gov. bond yield
d (eop)
EU
UR/USD (eop)
US
SD/JPY (eop)
GB
BP/USD (eop)
0.2
25
0.2
26
2
2.2
1.2
21
12
20
1.5
51
0.25
0.35
1.8
1.12
122
1.47
0.50
0.80
1.8
1.10
125
1.43
0.75
1.00
1.9
1.07
1
128
1.41
1.00
1.40
2.1
1.05
130
1.40
GDP
umption
Private consu
Total fixed inv
vestment
Export of goo
ods and services
Import of good
ds and services
CPI inflation
Unemployment rate (%)
Budget balance (% GDP)
unt (% GDP)
Current accou
(%yoy unles
ss stated otherwise)
2014
2
2016
2015
3.2
2.4
3.0
3.8
2.5
3.2
6.1
4.2
7.6
3.1
6.2
3.2
5.1
4.3
4.5
1.6
6.2
-2.8
-2.4
-0.2
5.1
-2.5
-2.6
2.5
4.5
-2.2
-2.7
Sou
urce: Thomson Re
euters Datastream
m, ABN AMRO Gro
oup Economics
nd out more abo
out Group Eco
onomics at: http
ps://insights.a
abnamro.nl/en
n/
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