US GDP A bright spot | EEF

US GDP: A bright spot

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Today’s Q4 GDP figures are poised show a strong end to the year for the US economy.  The forecast is for a slowdown from Q3’s rapid expansion of 5% (Q-on-Q annualised rate) but still solid at more than 3%. The US economy has proved resilient to the mid-2014 global downturn by relying on the strength of its domestic market and its booming energy industry.


The US (super) market

The size of the US domestic market means that the US is uniquely positioned to shield itself from sluggish overseas demand. About three quarters of all economic activity in the US occurs inside its borders meaning that domestic demand can somewhat compensate for the lack of growth in the rest of the world.

The key driver of growth in the US has traditionally been consumer spending and with the US economy creating about 3 million new jobs in 2014 and with energy prices tanking, the consumer's spending capacity has been significantly upgraded. Today’s figures are likely to show that consumer spending has once more been the major contributor to the US’s strong economic performance.

The upturn in the US labour market is also expected to reduce the budget deficit to about 2.6% of GDP, considerably lower than the levels observed since the recession. The surging of government tax revenues have filled the Fed’s coffers and the US energy boom has put the lid on massive imports of crude oil helping to smooth its trade deficit.  


But business spending uncertain

On the other hand, the performance of business spending is more uncertain. This is because the plummeting oil price is likely to push growth in different industries to opposite directions. The star performer of the US recovery so far, the shale-gas industry, is set to suffer as the low oil price renders the sector uncompetitive due to higher production costs compared to the oil-producing Gulf nations. Shale-gas producers are expected to cut investment in response.

Conversely, low oil prices should give a boost to the US manufacturing sector. The sector’s export-intensity means that manufacturers have the most to lose from the drying out of foreign demand and the dollar’s appreciation. However, the low oil price implies cheaper production costs that should improve the industry’s competitiveness. Today’s release is likely to shed some light on the impact of these countervailing forces on manufacturing capital spending.

The Fed is closely monitoring current developments; the strong recovery, falling unemployment, booming corporate earnings and robust consumer spending have reduced the necessity for monetary stimulus. Still, below target inflation and risks from a sluggish global growth environment could push the hike further towards the June Fed meeting.


Good news for UK manufacturers

A booming US economy is good news for UK manufacturers. In 2014, about 14% of UK manufactured exports found their way to the US market. With global demand deteriorating over the past six months and with the UK’s chief export market struggling (the EU), strong demand from the US is likely to prove a welcome boost to British manufacturing.


Being a major market for British goods exports, the solid performance of the US economy has not come as a surprise to UK’s manufacturers. In EEF’s latest Exec Survey, North America was cited as the market with the most potential for growth in 2015. British manufacturers are likely to capitalize on opportunities surfacing in the US market and seek export contracts in the other side of the Atlantic.

Within the manufacturing sector, the road vehicles and other transport sectors have a particularly large exposure to the US market. In 2014, about 21% of road vehicles exports went to the US with 82% of those being cars. The other transport sector sells 18% of its exports to the US where aircraft, spacecraft and related equipment make up the lion’s share of those exports at 95%. Both sectors are expected to benefit considerably from an uptick in demand in their biggest single export market.


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