US Growth Shows Its Strength

Growth Shows Its Strength

A five-day mid-term elections were followed by a publication of good growth figures, Thursday, Oct. 30, was a good day for the Government of Barack Obama. The US economy grew by 3.5% annually between July and September, according to the first estimate of the Department of Commerce. After rising 4.6% in the second quarter, it is the best six-month performance since 2003.

But it is unlikely that these figures are determinants in the electoral arena. A few months ago NBC / Wall Street Journal poll showed that 57% of Americans think the economy is still in recession. Statistical is evidence that, as flattering as the recent tidings are, they are struggling to become a reality.

First, even if the growth of the last two quarters has been dynamic, the average pace since the beginning of the year is nothing special: the increase in gross domestic product (GDP) is only 2% despite an extremely accommodative monetary policy from the Federal Reserve (Fed, central bank). “The growth figure for the third quarter is very good news, but when you look at it in detail, it is clear that the US economy is still recovering,” says Gregory Daco, an economist at Oxford Economics in New York.

GDP was supported by several factors that should not be recurring. This is the case of the sharp rise in public spending, especially in the defence sector. Exports have also demonstrated surprising dynamic (+ 7.8%), which will be difficult to repeat in the coming months.

This figure must be considered with caution because it is a first estimate does not take into account the month of September. The change in business inventories is also questionable. “Since the second quarter of 2011, quarterly GDP growth was revised eleven times thirteen, averaging 0.65 points, which is a substantial amount,” say Deutsche Bank economists.

For the rest, the performance remains modest. Consumption, which accounts for 70% of economic activity in the US rose 1.8% in the third quarter, slipped down compared to the 2.5% recorded three months earlier. There is also some disappointment about real estate: residential construction grew by only 1.8%, far from the 8.8% recorded in the second quarter. Finally, if business investment remains strong, growth capital investments, construction and intellectual property have slowed sharply (+ 5.5% against + 9.3% between April and June).

Back to modest growth

In fact, it seems that after catching up with respect to a first quarter in which GDP plunged 2.1%, there is a kind of return to modest growth. “It still lacks a key element in the US economy accelerates: the significant wage growth,” said Mr. Daco. “As long as it will not be the case, we will see economy recovering,” he insists, adding that a number of leading indicators show that the underlying wage pressures begin to appear. This is particularly the case in SMEs where the intentions of entrepreneurs to raise salaries in the next six months are trending up.

But this movement on wages is likely to be slow, despite the improvement in employment. The unemployment rate actually fell to 5.9% in September. But the numbers of long-term unemployment, jobs experienced part-time and low participation rate (the proportion of the working age population that is employed or otherwise effectively seeks) show that the situation of the labor market is still not returned to normal.

Another downside: still weak inflation. The index measuring personal consumption expenditures in the third quarter grew 1.2% year on year, far from the 2% target that the Fed has set.

Although consumer confidence is at its highest in seven years and the decline in the price of gasoline gives extra purchasing power, the US economy remains fragile and is not immune due to the slowdown in the rest of the global economy coupled with the continued rise of the dollar.

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