Higher interest rates to impact housing in the United States: NAB
Moderate growth in the US is expected to continue, but with some strengthening later in the year if, as expected, the new Administration delivers a fiscal stimulus, according to NAB’s latest update.
The President has indicated details of his tax plans will be released in 2-3 weeks.
However, the size of any stimulus is likely to be more limited than the President’s election policies would suggest due to the underlying weak budget outlook.
The US economy continues along the same moderate growth path it has experienced in its recovery from the Global Financial Crisis.
Growth slowed in the December 2016 quarter, following a particularly strong headline result in the September quarter.
The underlying details were reasonable: consumption growth was solid, residential investment resumed growing again and business investment showed some further improvement.
Temporary drags came from a fall in power consumption and the reversal of last quarter’s spike in food exports, although they were partly offset by faster inventory accumulation.
More positively, business sector readings for the US from the ISM have been trending up in recent months.
In January, the manufacturing ISM moved to its highest level since late 2014 and, while the non- manufacturing ISM declined slightly, it remained at a robust level.
Consumer sentiment has also received a post-election boost, and is back to pre-GFC levels.
The labour market is also in good shape, with strong growth in non-farm employment reported for January 2017.
Nevertheless, there has been a trend slowing in employment growth as the US moves closer to full employment, although it remains strong enough to pull down unemployment over time.
While the unemployment rate rose in January to 4.8%, reversing some recent gains, this was due to a rise in workforce participation.
Further evidence of the strength of the labour market comes from initial jobless claims which are at historically low levels.
The January employment report also showed a slowdown in wages growth; however, the data are volatile and the trend still appears to be upwards.
Improved consumer and business sentiment since the election, as well as the rise in the stock market, and on-going strength in the labour market are positive signs for the growth outlook.
Measures of future manufacturing capital expenditure intentions have also improved recently.
However one headwind is the appreciation of the US dollar since August which we think has a bit further to go notwithstanding some pull-back in recent weeks.
That said, the manufacturing sector, which is particularly trade exposed, appears to be largely unaffected so far if the ISM survey is anything to go by.
Along with a higher dollar, interest rates have increased which is likely to weigh on sectors such as consumer durables and housing.
Changes in credit conditions overall are threatening to turn into another headwind.
Lending standards for business loans tightened somewhat last year, although the most recent Fed Senior Loan Officer Survey suggests that this process has paused for commercial and industrial loans.
Moreover, credit conditions are starting to tighten for consumer loans.
Balancing this, however, credit spreads (relevant for corporates accessing non-bank finance) have eased.
Rising oil prices may also hold the economy in check as the US is a net importer of energy.
That said, while a clear negative for household consumption, some businesses will benefit from higher oil prices.
In particular the energy sector but also manufacturers and businesses that provide inputs to the sector.
“Reflecting these various factors, we expect further moderate growth rates in coming quarters before some strengthening later in the year, assuming the President delivers a fiscal stimulus to the economy.
For 2017 we are forecasting GDP growth of 2.1%, and 2.3% in 2018.
We have not made any allowance for the US imposing additional trade barriers or changes that will significantly reduce net immigration.
These represent downside risks to the outlook,” the update stated.
