The Inventory Swing and the Fiscal Cliff Increase Odds of Mid‐Year Lull

  • Real GDP growth for the recently completed first quarter of 2013 appears likely to exceed earlier expectations when the first estimate is released on April 26. Despite the drag from fiscal tightening, real GDP growth is set to register in the range of 2.5 to 3.0 percent, boosted in part by the aftereffects of Hurricane Sandy. Hurricane Sandy depressed inventory accumulation in the fourth quarter of 2012, which in turn set the stage for increased inventory accumulation in the first quarter, which could also extend into the current second quarter. The storm’s direct hit on major population and manufacturing areas on the East Coast gave it disproportionate influence on headline GDP. With inventories restocked in Q2, we could see weaker output numbers in the second half of this year as manufacturing dials back in the face of only-moderate final demand growth.
  • Overlying the whipsaw from Hurricane Sandy is the wet blanket of ongoing fiscal tightening. It is important to remember that we are still in the early days of fiscal tightening. Full effects may not be felt until mid-summer. We will not know the full drag from fiscal tightening until the third quarter GDP data is released late this year. The combination of the inventory whipsaw and fiscal tightening points to slower growth in the second half of this year. We may yet be in store for a repeat of the all-too-familiar summer soft patch.
  • Balancing out the downside risk is upside potential from real estate, autos and labor.  House prices continue to firm up throughout the country. House price gains combined with very low interest rates mean that homeowners are now building equity in their houses as rapidly as builders are building them. Commercial real estate markets are also improving nationwide.  The positive wealth effect from improving house prices means that households are feeling more comfortable in taking on auto loans. Home construction and auto sales in turn support employment which drives income in a virtuous economic cycle.
  • Sounds good until the jobs fail to show up, which they did in droves in March when only 88,000 payroll jobs were added on net.  On a moving average basis, job growth over the past two years has centered around 180,000 jobs per month.  April should show a correction back up to the 180K trend.  The failure to see an upward correction soon would rewrite the narrative and increase the odds of another summer soft patch. The unemployment rate dipped in March to 7.6 percent for all the wrong reasons as the labor force contracted by a sizeable 496,000. Labor force growth has been surprisingly weak in the aftermath of the Great Recession. outlook 4-10

Click here for the complete April 2013 U.S. Economic Update: USEconomicUpdate0313

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