The US economy performed robustly over the spring and summer. GDP growth, admittedly, fell from 3.9% at an annualised rate in the second quarter to 1.5% in the third, according to preliminary data. This slowdown, however, largely reflected a decline in stockbuilding: final sales rose by an annualised 3.0% last quarter. GDP growth averaged a solid 2.7% across the two quarters.
Economic health in mid-2015 had been signalled by narrow money trends at end-2014. Six-month growth of real narrow money fell sharply in summer 2014, warning of a loss of momentum in early 2015, allowing for the usual lag. It rebounded strongly from October, however, peaking in February 2015 – see first chart. The message was that the poor start to the year – exacerbated by bad weather – represented a temporary soft patch, with news likely to improve significantly later in 2015.
The consensus expects growth to remain strong by the standards of the upswing to date. The mean forecast for annual GDP expansion in 2016 is 2.6%, according to Consensus Economics, with the IMF projecting 2.8%. This compares with average growth of only 2.1% annualised from the recession trough in the second quarter of 2009 through the third quarter of 2015.
This optimism is questionable, for two reasons. First, real narrow money has slowed again since the spring, with six-month growth in August / September the lowest since January 2010, and weekly data suggesting no recovery in October. Real M2 and bank lending are holding up better but have also lost momentum – first chart.
Secondly, stock changes are likely to be a further drag on GDP growth over coming quarters. The 3-5 year Kitchin stockbuilding cycle last bottomed in 2012, so another trough is due in 2016 or 2017. As previously discussed, the ratio of non-farm inventories to final sales of goods and structures is usually above its long-run downward trend at the peak of the cycle, and below it at the trough. It remained elevated at end-September, despite the fall in stockbuilding last quarter – second chart.
Strengthening non-US real narrow money growth – particularly in China – suggests that the global economy can regain momentum even if the US slows. Economic “rebalancing” from the US to the rest of the world would be favourable for markets, supporting equity earnings while allowing the Fed to go slow on rate rises. The current monetary evidence supports this benign scenario but further US narrow money weakness, or a relapse in China or the Eurozone, would warrant a reassessment.
