US Economic Update – 02 March 2015

No new information in Janet Yellen’s testimony last week, focus is now on payrolls and unemployment data

In the US Janet Yellen took center stage last week with her testimony to the Congress and the Senate Banking Committee, where she was grilled on the outlook for the economy and future monetary policy.

On the whole, there was no new information revealed in either of these testimonies, except that the eventual removal of the word “patient” from the FOMC statement should not be taken as an indication that rates will rise in exactly two meetings time.

In addition to this focus upon Janet Yellen, US GDP and inflation figures also commanded some attention from investors, with both surprising to the upside slightly.

This was as GDP for the fourth quarter of 2014 came in at 2.2% on an annualised basis as opposed to the official projections of 2.1% growth. Headline inflation on a month on month basis fell further into contraction territory in the US during February, although core CPI bucked the trend when it unexpectedly rose from 0.1% to 0.2%.

We see the core CPI figure as the more important at present as it strips out the effects of lower oil prices, which is important as the Fed continues to describe the current weakness in energy prices as “transitory”.

This means that, like with the Bank of England, the FOMC will probably look through the near term impact of these downside price pressures in favour of a focus upon a wider basket of goods over a longer time horizon.

In addition to this we note that the Fed’s preferred measure of consumption in the US economy, the Personal Consumption Expenditures Index, is due out later on today.

We are unsurprised by official projections which appear to indicate that consumption will have fallen on a year on year basis, as we have recently observed an uplift in the household savings ratio.

This we take to mean that consumers are bolstering their own balance sheets ahead of the summer when the Fed is widely expected to raise rates and therefore, we are unfazed by the prospect for a minor reduction in consumption.

Last but by no means least February payrolls and unemployment data will be released this Friday. These are projected to highlight another month of strong jobs growth accompanied by a further decline in the unemployment rate.


The takeaway

On the whole the US economy remains on the path of recovery, with growth continuing to surprise on the upside, which is a broad plus for investors.

Going forward our expectations are much the same as with the UK in that we expect wage and inflation figures to take precedence for investors over other forms of data.

Most notably, we expect that the recovery in oil prices that was seen throughout late Jan and Feb will be likely to highlight a minor rebound in inflation measures when the relevant figures are released this month.

This will probably lead to louder voices among interest rate hawks in the US, particularly if the nascent recovery in crude prices is to continue into Q2.

As a result, we continue to believe that an initial interest rate hike will most likely come from the Fed sometime during the second half of this year.

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