US: Growth Solid, But Detail Weak

The US economy's performance in the December quarter and 2011 underlined the performance of much of the global economy: warm in places, cool in others.

There's nothing new in that, it's been that way for more than two years, but there are signs the US isn't as sluggish as it was midyear.

The GDP figures and earlier data from manufacturing orders and industrial production suggest the economy is doing a bit better than the bald numbers suggest (and the US Federal Reserve believes, according to its latest statement last week).

We will have a chance to look at further evidence for this idea when the monthly surveys of US manufacturing and services activity and the January jobs data are released this week (see diary).

As well, Fed chairman Ben Bernanke gives testimony to a US Congressional Committee Thursday night, our time.

The latest GDP data shows US growth hit an annual 2.8% in the 4th quarter (Americans measure growth on an annualised basis), up from 1.8% in the September quarter and much stronger than the 0.4% of the first three months of the year.

The 4th quarter reading was the strongest for 18 months.

It was much stronger than the negative growth seen in Europe and the UK.

And, unlike China, which saw growth slow to an annual rate of 8.9% in the final quarter from more than 10% at the start of 2011, US economic growth grew in strength over the 12 months.

It belied those worries from May through October that the US economy might dip into a second recession.

It left America with an annual growth rate for 2011 as a whole of 1.7%, slower than the 3.0% of 2010, but much stronger than the 3.5% contraction in 2009.

So on the broad numbers (which are a first estimate and probably will get revised on the second reading at the end of next month, and March), the economy's performance was OK, but the details of the report were mixed to weak and showed us the weakness of the US at the moment.

Almost two full percentage points of growth came from a build up in stocks in the quarter, while cuts to government spending (defence, federal and state), knocked almost one percentage point off output, a significant weakening and due to be repeated in 2012 and 2013.

The build up in stocks is likely to be revised next month, but it still worried analysts who think it could reflect over-optimism by business and won't be backed by a surge in consumer spending (which accounts for almost 70% of the US economy) in the next six months.

If that doesn't happen, then the excess stocks will weigh on the economy until reduced, adding downward pressure to growth.

But a 3% increase in durable goods orders in December, especially in cars, planes and a rise in business spending, has seen the likes of GE, Caterpillar and Easton Corp, three major manufacturers, talking confidently about good growth expected in 2012 for their domestic American businesses.

In fact despite weak earnings and sales forecasts in the current 4th quarter reporting season, there have been plenty of upbeat forecasts from other major industrial groups (Boeing is another, along with Ford) for demand in the US economy in 2012.

That could explain the gradual improvement in employment seen in the final quarter and January expectations of several more solid months of new job growth.

Consumption rose at a modest annualised rate of 2%, but final sales (that's everything excluding the build up in stocks) rose 0.8, down sharply from the strong 3.2% growth in the September quarter.

While that was a weak performance, there were signs of a turnaround in house building, with residential investment rising at an annualised rate of 10.9% in the quarter.

Also on Friday, the Thomson Reuters/University of Michigan consumer sentiment survey showed optimism jumped in January to the highest level in almost a year, rising to 75 from 69.9 in December.

That was higher than the mid-month 'flash' reading of 74 and surpassed forecasts.

Exports climbed 4.7% while imports rose 4.4%. Inflation, as measured by the consumer PCE index (the Fed's favourite measure), rose 0.7%, but that was down sharply from a 2.3% increase in the third quarter. Excluding food and energy, the index rose 1.1% compared to 2.1% in the third quarter.

Real disposable income edged up 0.8% in quarter and the personal savings rate fell to 3.7% from 3.9%.

That increase in new orders for durable goods orders of 3% in December, following an upwardly revised 4.3%; that was confirmation of a surge in orders at the end of the year and possibly part of an explanation about the build up in stocks and the improvement in job creation late last year.

But while there were signs of life in residential investment in the quarter, new home sales were again weak and fell.

Sales of newly built single-family homes dropped 2.2% in December to a seasonally adjusted annual rate of 307,000 , compared with 314,000 in November.

For the entire year, the US Commerce Department estimated just 302,000 new homes were sold - down 6.2% from 2010 and the worst year in government records dating back to the 1960s.

The reason: the continuing glut of existing homes on the market, including large numbers of foreclosed properties and other homes priced at steep discounts.

Sales of existing houses hit a year high in December and the number of unsold homes fell to a six year low, but there are hundreds of thousands of houses still in the foreclosure pipeline.

So good news and bad news from the US, and many economists reckon growth will slow to 2% this quarter.