Below is an overview of US data over the holiday season. Overall, US data continues to surprise on the upside, although there were a few negative surprises as well, notably the ISM manufacturing index for December.
ISM fell from 58.7 in November to 55.5 in December (consensus: 57.5). However, as we have argued for some time, ISM looked too high relative to actual hard data and we have therefore looked for a decline for some time. This finally came in December. It is not much of a concern, though, as it merely brings ISM more in line with where the economy actually is.
GDP growth for Q3 was revised up to 5.0% from 4.3% mainly because private consumption was revised to 3.2% rather than 2.5%. Q4 growth is tracking 2.5-3% based on monthly hard data. We look for growth in H1 15 of around 3% but risk is slightly on the upside due to the stronger-than-expected decline in oil prices.
The US consumer is the main driver of the recovery and data for November surprised on the upside. Gasoline prices continued to decline, falling to USD2.20 per gallon from around USD3.7 over the summer. This will continue to give a boost to consumption in December and January data. Consumer confidence from the University of Michigan rose in December to the highest level since January 2007 whereas the measure from the Conference Board has been flattish over recent months.
Corporate investment spending took a breather towards the end of 2014 after strong growth over the summer. Durable goods orders for November continued the softer picture seen in previous months. We see this mostly as temporary, though, as fundamentals for companies are good: profit growth is robust, consumer demand is gaining pace and financing costs are at a lower level. Investment in the energy sector will take a hit, however, due to the sharp decline in oil prices.
Inflation (PCE) fell further in November to 1.2% y/y from 1.4% y/y in October. This is likely to drop further in coming months as the lower gasoline prices feed through. Inflation could fall to around 0.5% judging from a simple relationship with gasoline prices (see chart below). However, this will not be a surprise to the Fed as Chairman Janet Yellen said at the press conference following the December meeting that the Fed expected a decline but saw it as temporary. It is more focused on medium-term inflation pressures coming from a tighter labour market and a gradual rise in wage growth. We continue to look for the first hike in June this year.
The USD has continued to strengthen over the past week, working to reduce inflationary pressures further and causing headwind for US manufacturers.
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