US enjoying consumer-led growth spurt in Q1, eyes on Q2

April 1, 2013

Spring is in the air and U.S. growth is getting unexpected support from the nation’s doughty consumers.

Despite higher taxes, households are lifting spending, begging the question of how much momentum will carry into the second quarter and what it means for Fed bond purchases.

After early-year fears that the fiscal cliff and automatic public spending cuts could tip the country back into recession, some economists now feel confident enough to upgrade projections for the first quarter ahead of all-important monthly payroll data, due on Friday. From JP Morgan’s Mike Feroli:

By our estimation Q1 GDP growth now looks to be tracking around 3.8 percent, which would make it the third fastest quarter in the current expansion which began in mid-2009. There is still a decent amount of Q1 data to be released before the first look at GDP at the end of April, but barring some fluke we believe the quarter’s growth will almost certainly print decently above-trend.

Macroeconomic Advisers has also upgraded their Q1 forecast by one tenth of a percentage point to 3.6 percent (annualized) following strength in single family housing starts.

True, buoyancy in the first three months of the year partly reflects stronger inventory building after a weak contribution from this source during the previous three months. But U.S. personal spending has also surprised on the upside despite higher taxes that will drain roughly $200 billion from the U.S. economy this year, according to JP Morgan.

February personal income data showed real consumption in the first quarter around 3.3 percent (seasonally adjusted, annualized), buoying retail sales and lifting optimism that the economy has embarked on a durable recovery.

What does it mean for the Fed?

Policymakers had anticipated a fair amount of fiscal drag when they submitted quarterly economic forecasts last month, and have since said they will watch closely to see how much actually transpires.

The Fed says it will keep buying bonds until it sees a substantial improvement in the outlook for the labor market. That said, some policymakers like the idea of tapering buying back if the payrolls data notch a few more months of 200,000-plus new jobs created.

But Chairman Ben Bernanke keeps going out of his way to stress the risks posed by persistently high U.S. unemployment, suggesting no sense of urgency from the Fed’s leadership to quickly pull back its generous policy accommodation.

There is also the danger that the impact of the sequesters will take several more months to emerge, to say nothing of fresh tension in Europe following a messy bail-out of Cyprus.

And a weaker reading from the U.S. manufacturing ISM in March also sent a warning that the second quarter might get off to a softer start. From economists at Nomura:

After getting a boost from inventory rebuilding in Q1, it is apparent that firms are feeling, or expect to feel, the effects of fiscal drag going forward.

Reuters’ latest poll found that Wall Street analysts continue to expect the Fed to keep buying bonds throughout 2013.

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