While the announcement last month of a major decline in GDP growth during the 1Q14 came as a major negative surprise, this month’s revisions of US GDP data were positively surprising. The 1Q decline was revised to 2.1% from a 2.8% q-o-q seasonally adjusted annualised rate (SAAR). Moreover, the first estimate of the 2Q GDP number was also better than expected at 4.0% q-o-q SAAR. While the 1Q was substantially impacted negatively by the unusually cold weather, a relatively volatile pattern in quarterly growth could also be observed in past years and both quarters might prove to have produced extremes on both ends. Interestingly, total GDP development is not entirely reflected in crude oil demand, which saw a strong development in the 1Q and a weaker trend in the 2Q, which will need more analysis. However, the GDP growth trend of the second half of the year is currently expected to be less volatile and at a more moderate rate of slightly below 2.5%. This 2H14 forecast takes into consideration the fact that while the economy is gaining strength, some uncertainty remains regarding the depth of the recovery, given the experiences of past quarters and the still not fully recovered labour market.
While the labour market has significantly improved over the past months, the latest batch of data was mixed, particularly with regard to the unemployment rate moving up again from 6.1% to 6.2%. Non-farm payroll additions in July grew by a healthy 209,000, which is slightly below expectations, after a positively revised 298,000 in June. The share of long-term unemployed remained almost unchanged at 32.9% in July, substantially below this year’s peak level of 37.0% in February. The participation rate remained at only 62.9%, while it has slightly improved from June. Given the relatively positive development in the labour market and in household income, consumer confidence recently stood at solid levels. The Conference Board’s consumer confidence index rose to 90.9 in July, the highest level since December 2007. The PMI for the manufacturing sector, as provided by the Institute of Supply Management (ISM), has also registered a robust trend once again. It was 57.1 in July, compared to 55.3 in June. In addition, the ISM for the services sector increased to 58.7, versus a June level of 56.0.
Given the now better-than-initially-estimated 1Q14 GDP growth and the healthy 2Q14 GDP growth number, the GDP growth forecast for 2014 has been revised up to 2.0% from 1.6%. The current moderate level of expansion is taking GDP growth to 2.6% in 2015, unchanged from the previous month.