Concerns were raised about the world's largest economy after a disappointing first quarter in which US GDP shrank by 0.5% over the quarter (or by 2.1% on an annualised basis). However, this contraction was largely the result of temporary factors including adverse weather conditions and a correction in inventories.
The revised estimate for the 2nd quarter painted a much more positive picture with quarter-on-quarter growth of 1.0% (i.e. an annualised growth rate of 4.2%), driven mainly by personal consumption spending and a rise in inventories (see Figure 3). This rebound was broadly in line with our previous expectations, so we are still expecting average US growth of 2.1% in 2014, picking up to around 3% in 2015.
Barring any major adverse shocks, we expect the Fed to stop buying assets and end its QE programme before the end of this year. Following on from this, we would expect the interest rate to start to rise during the second half of 2015, based on our growth projections.
Alongside the strong Q2 growth rate, many of the key economic fundamentals in the US suggest the recovery is robust and that interest rate rises later next year are plausible.
Employment has been recovering well, with over 200,000 non-farm jobs added each month from February until July. The unemployment rate has also fallen by 2 percentage points in the two years from July 2012 to July 2014, to a rate of 6.2%. This implies that consumption is likely to remain relatively strong, helping to stimulate growth.
Household debt as a percentage of GDP has fallen from just over 98% at the start of 2009 to a littleover 80% in the first quarter of 2014. This makes it likely that the observed increases in consumption will be sustainable as they are not exclusively reliant on consumer borrowing. This is reinforced by the recent upward revisions to the personal saving rate for 2011, 2012 and 2013.
The US has been experiencing a fiscal squeeze as the government seeks to cut the budget deficit. While the US is growing, this is prudent fiscal management that will limit the growth of government debt.
Another positive for the US is the rise in commercial and industrial bank lending. In the years after 2008, commercial and industrial loans fell significantly, but by July 2014 this had picked up by more than 40% from its low point. The Fed's QE policies seem to have had the desired effect of stimulating lending to the real economy.
These fundamentals suggest the US recovery is on track, but here are some key dates to watch out for that should give us more information: