U.S. 2013Q1 Growth | Is the American dream back?
A word of caution from a fiscal perspective: Recent good news, as in positive figures in the U.S. private sector activity, decreasing jobless claims, the pause (perhaps even replacing) of sequestration or even factories that come back to production after decades, support the fact that the U.S. economy is currenty experiencing a positive momentum, which combined with the confidence of both investors and consumers and the partial "solution" to the fiscal cliff issue could drive economic growth more than 2.0% this year. The key word here is could: although there is a probability, we believe that a careful analysis would also need to consider the medium-run risks that the economy is facing, without paying too much attention to momentum. Truth be spoken, none of the medium-run risks we identified as early as last year have dissapeared, some of them even have more relative probability of ocurring; and this is why our overall view of the economy for this year remains neutral. However, since 2013 remains a crucial year for this decade and what might or might not be done with the economy in terms of austerity, both at the fiscal and monetary policy are to have direct consequences on the performance of the next 5 years; a neutral 2013 due to adjustment of the economy in the monetary and fiscal arena could be viewed as the beginning of a better, more bullish and interesting future. Is the American dream back? Not yet would be the best answer.
Sequestration is the short-term expression of financial austerity:
1) Sequestration: Sequestration is an automatic $85 billion "sequester" spending reduction package mandated to start on March 1st; that is, in case politicians do not strike a more modest deficit reduction deal or an alternative before then. Some economists "said the cuts would shave 0.5 percent or more from economic growth, as government employees and contractors around the country would tighten their own spending in the face of slowed government disbursements and furloughs" (AFP). Notice that sequestration is a bad outcome for both Democrats and Republicans: Democrats are against sharp reductions and want to replace the idea of sequestration with targeted spending cuts; while Republicans want to avoid cuts to defense spending that are an essential part of sequestration. Therefore, the odds that sequestration (as in it original definition) occurs are not many. Most likely we will see some mix of solutions. However, the whole uncertainty feeling regarding sequestration is and was never good for the economy. Now, this issue goes well beyond March because obviously not only whatever they decide to do with sequestration but also whatever they decide not to do with sequestration will have a direct impact in 2013Q2. Here three possible scenarios:
1) Scenario A: Basically, the amount of cuts does not change.
2) Scenario B: Parties agree to pare back the issue to $500 ~ $800 billion for the next 10 years.
3) Scenario C: Sequestration is called off, at least for 2013. That would imply both finding approximately one trillion dollars in deficit reductions throughout alternative ways and transporting uncertainty from 2013Q1 to 2014Q1.
While some people do not care (http://www.investometrica.com/articles/2013/02/22/why-we-should-not-worr...); just consider how different these three scenarios are. We do not want to over emphasize the importance of this "game-theory" like political discussion on the fiscal management but at least we ought to say that whatever happens to the issue of sequestration in the next days will certainly have consequences in the economy.
2) Fiscal Austery and its market implications: Sequestration is part of a big long term issue called fiscal austery. Even if it is not under the word sequestration, eventually tax rises and budget cuts will occur. This is a fact, born by the way things were solved after the 2008 crisis. Fiscal negotiations on debt ceiling extensions and their respective variations will only intensify in the following months. This uncertainty, combined with the direct effect of such measures on the national GDP through household consumption and government spending will produce a negative effect on the economic growth of the country. As political negotiations increase, so will the risks associated with fiscal drags and the business uncertainty, causing global investors to allocate a smaller proportion of their assets to the U.S. or at least to think about doing so. Therefore, investment will also be damaged. While it is too early to assess the impact of these elements on the economy, we believe that it is too optimisitc to say that the economy will grow more than 2.0% this year; since if we only consider the effect of a good amount of consumer spending that will be gone by contractions in payrolls and indirect effects of higher taxation; it is worrying enough to keep a rather neutral view on the economy.
Fortunately, there are more than downsides in the U.S. Like everything in this life, there is a trade off between short run pain and long term healing. Fiscal austerity will bring long term health to the economy. As the balance sheets of households, government and private sector come back to normality, so will the risk levels associated with assets. Keeping in mind that the Fed will maintain mortgage rates at low levels, we expect a decent progress in the construction sector and a pickup in investment by 2014-2015-2015.
|Real GDP (%, q/q) - Investometrica.com||1.3||1.6||1.8|
|Real GDP (%, q/q) - Bloomberg Consensus||1.7||1.7||2.2|
|CPI (%, y/y, avg)||2.0||2.0|
|Policy Rate (%, eop) 0||0-0.25||0-0.25||0-0.25|
(*) The consensus estimate comes when you take the analyst who are currently following a stock or economy and average out their expectations for revenues and earnings (in the case of a company) or economic growth (in the case of an economy).
Illustration - Great American Dream by Wademar Kazak ~ Deviantart.