A fall in US economic growth would be the last straw for global financial markets. Here, FIIG chief economist Craig Swanger looks at the current state of the US economy and highlights what to look for to warn of an impending meltdown
We’ve used the headline “Good but not great” for the US economy for the last few months. This has been to highlight that growth is below average for the US, but steady. And it has been to flag the key point for Australian investors; namely that we need the US to remain steady, for a fall in the US economy would be the last straw for financial markets, particularly equities. There is enough volatility coming from the concerns over China, Europe and Japan so the last thing we need is the US slowing too.
And so far, so good. GDP growth in the first quarter of 2016 is likely to be around 2.0%pa on an annualised basis. This is slightly below the 2015 pace, but that was to be expected as the final quarter in the US was propped up by the temporary support of rising inventories (rising inventories in a quarter mean that more goods were bought by wholesalers or retailers than they sold, which provides a boost in that quarter, but is a signal that the following quarter will see inventories fall back again as businesses don’t like to carry excess inventory).
So far this quarter housing starts and existing home sales have been in line with a 2.4%pa growth rate; employment growth also supports the view that the economy is growing at around 2.4%pa; but construction and manufacturing purchasing suggesting growth well below 2%pa. Mixed data, but generally pointing to a growth rate of around 2%pa which is good enough for the rest of the world for now.
One relatively small headline but something to keep an eye on during 2016 is the sudden growth in credit card debt in the last quarter of 2015. Average growth in credit card debt has been around $5-10bn per quarter over the past twenty years, but in the last quarter of last year it jumped by $52bn averaging $18bn per quarter last year. The impact of this credit fuelled spending on GDP growth would equate to around 0.8% of the US 2.4% GDP growth last year. Credit card growth at this rate is not sustainable, and while this is just one quarter’s data, it is a trend that we will watch over 2016. We prefer to see sustainable spending, not credit fuelled spending, all other things being equal.
Strategy: No change. Just something to watch.