– Very busy calendar of events and economic data releases in the US next week. The main event will be the publication of the November Employment Report, integrated by November ISM surveys,…..
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September and October data on the housing sector, and by revised 3Q GDP data. On the whole, data should prove to be positive, especially on the labour market front, with nonfarm payrolls still picking up at a pace of close to 200k a month, confirming the modest effects of the October fiscal crisis on macro indicators. The removal of distortions tied to the government shutdown in October should result in the unemployment rate dropping to 7.2%, despite a higher participation rate (see “Market Movers” section).
– Despite positive November data, growth in 4Q 2013 is expected to slow towards 2% q/q ann., after Q3 growth, inflated by the strong inventories contribution (estimated at +1.1pp), which should be revised up to +3.1% q/q ann. What is the picture for 2014, and what are the implications of the economic data for monetary policy?
– US growth in 2014 should at last record an increase in private domestic demand averaging around 3% q/q ann. Households balance sheets and the housing sector are definitely healed, fiscal consolidation should be more moderate than in 2013, while monetary policy will remain extraordinarily accommodative.
– In 2014, we forecast growth at 2.8%, with consumer spending picking up at a pace of around 2.5%, a recovery in fixed corporate investments to +5.6%, and another double-digit growth rate in residential investment (12.9%). Net exports channel should make a broadly neutral contribution. Public spending will continue to contract, but much less so than in 2013, thanks to expanding state and local budgets, and to a more contained estimated correction at the federal level. In 2013, the decline of the federal deficit/GDP should amount to around 3pp, as opposed to a correction of around 0.4pp in 2014, under current legislation. The easing of the fiscal burden should allow private demand to expand at a pace close to 3%, generating an employment growth sufficient to bring the unemployment rate close to 6.7% at the end of 2014. In 2015, the adjustment of the labour market should restore unemployment to its long-term equilibrium level 5.5%).
– The main risks weighing on 2014 are still tied to economic policy developments. As regards fiscal policy, the scenario still depends on the agreement on the budget, that should be reached by 13 December, and allow Congress to approve a budget law before 15 January, when the current provisional budget expires. Information on the advancement of the Budget Conference Committee’s work is very scarce. Political tension has mounted recently, following the changes imposed by the democrats on the rules governing obstructionism at the Senate, on the votes on the President’s appointments. However, we expect a mini-agreement to be reached before the deadline, with the result of reducing defence spending cuts in 2014, pushing back in time the automatic cuts, worth around 30 billion dollars, introduced by the Budget Control Act, to beyond 2014. This way, the reduction of overall primary spending should amount to around 60 billion dollars, approximately 0.4pp of GDP. Given this scenario, fiscal policy should not pose serious obstacles to growth at least until after the mid-term elections in November 2014.
– As regards monetary policy, October-November data may prompt the Fed to start tapering asset purchases already in December. Should the FOMC opt to use the press conference scheduled following its next meeting to announce the policy reversal, we believe forward guidance would be enhanced, with the aim of anchoring the yields curve to close to its current levels. For the time being, the probabilities of the pace of asset purchases being reduced starting in December or January are very similar. The market is prepared for an impending reversal, but the FOMC’s message has been acknowledged: fed funds futures are now pricing in stable rates until the end of 2Q 2015.
Appendix
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