The US economy expanded at a 3.2% pace in Q4 2013, laying the ground for further improvement in 2014. Although the details were a bit weaker than the headline, the GDP data give the Fed more support to continue tapering its asset purchases.
With the Q4 data in hand, GDP growth in H2 2013 was 3.5%, close to the strongest rate of growth we have seen in a decade. This suggests that the key reasons for the weakness in demand over the past few years have now begun to diminish. Given the current momentum in the economy and the fading fiscal drag, the 2.8% consensus forecast for US GDP growth in 2014 appears too conservative. We expect growth of 3¼%. For now, we expect 3.2% growth in Q1 2014 and see growth remaining above 3% in the following quarters this year.
Overall, the Q4 GDP report reinforces our view that when wage and inflation readings start to pick up later this year, markets will start questioning the Fed’s commitment to keep the real Fed funds rate negative through 2016. The result will be further increases in bond yields this year as expectations for the fed funds rate in 2015 and 2016 go higher.
The improving US growth outlook also keeps us optimistic on the outlook for the USD in 2014.
Looking at the composition of GDP, there were improvements from the previous quarter. Thus final sales (GDP less inventories) rose 2.8%, up from a 2.5% gain in Q4. Although this was somewhat weaker than headline GDP growth and our 3.4% estimate for final sales, we remain optimistic for 2014.
A key driver of Q4 final demand was a 3.3% annualised increase in consumer spending, the strongest rise in three years. In addition to consumer spending, the rise in final sales in Q4 was led by business investment (+3.8%) and net exports (adding 1.3% point to GDP growth, driven by stronger exports), while government demand (-4.9%) and residential investment (-9.8%) declined. A jump in inventory accumulation added 0.4% point to GDP growth in Q4.
Nordea