United States President Donald Trump is inheriting an economy which is showing signs of staging a comeback of significant proportions over the next two years.
A recent manufacturing activity survey rose for the fourth month in a row in December to its highest level in two years.
Although recent appreciation of the US dollar was an emerging headwind for manufacturers, the sector was likely to benefit from the end to the recent inventory correction and improving conditions in the energy sector.
At the same time, the non-manufacturing survey had also been improving and is at an above average level. Small business optimism has surged following the presidential election.
Data provided by the Bank of New Zealand and its parent National Australia Bank showed consumer confidence had improved since Mr Trump’s election on November 8 and was now at pre-global financial crisis (GFC) levels.
"This is despite a rise in petrol prices but may reflect increased optimism about the economy’s future and the boost to the sharemarket which is increasing household wealth," BNZ senior economist Craig Ebert said.
Improved consumer confidence should support household consumption. Early signs were positive for December consumption. Vehicle sales increased 3.1% from November and the number of "heating days" was a little above average, signalling a likely boost in utility power consumption.
The improvement in sentiment was also evident in investment indicators. A simple average of regional Federal Reserve future capital expenditure indicators for manufacturers started to increase in September but jumped noticeably higher in November and December to its highest level since early 2007, he said.
After falling in the June and September quarters, residential investment was set to show growth again in the three months ended December. Monthly average private new residential construction expenditure and house sales for October and November were both higher than in the September quarter. However, mortgage rates had increased sharply in recent months and it was unclear how long the improvement would last.
A spike in rates in 2013 was followed by a slow down in residential investment. Building permits were also tracking higher in the December quarter, suggesting some some short-term positive momentum for construction. Pending house sales had eased and forward looking indicators were mixed, Mr Ebert said.
In contrast, net exports were set to make a negative contribution to the December quarter. Across October and November, real goods imports were up on their September quarter level and real goods exports were down 2.3%. The fall in exports appeared to largely reflect an unwinding of the September quarter surge in soybean exports.
While the focus on fiscal policy was on what the new president and Congress might do, public demand appeared to be increasing modestly. Construction spending appeared to have levelled out but the impact of defence cutbacks appeared to be over and government employment was increasing.
Consistent with activity indicators, the labour market continue to show further tightening. Non-farm employment increased by 156,000 in December, Mr Ebert said.
Overall, the data was pointing to a slow down in the rate of employment growth. The growth rate on a year earlier, at 1.5%, was the lowest it had been since 2013.
"This is not surprising and will be a concern to the Federal Reserve."
The working age population was estimated to be growing at only 1.1% year-on-year. Over time, workforce growth was likely to be lower due to demographic changes. As a result, the unemployment rate would continue to fall. The unemployment rate increased by 0.1% to 4.7% in December but was still down 0.2% since September. The unemployment rate was not only lower than it was a year ago but it was also below the Fed member median estimate of its long-run level.
Further evidence of a tight labour market came from the increasingly clear upwards trajectory in wages growth, Mr Ebert said.
The BNZ’s estimate for December quarter GDP, or economic growth, based on partial indicators released to date was for annualised quarterly growth of just above 2%.
Consumption growth had remained solid and investment had strengthened. But there was likely to be a significant negative contribution from net exports.
Rising oil prices might also have an effect on consumer spending but the bank was positive about other parts of the economy.
"We also believe the dollar is likely to appreciate further although it is unlikely to match the mid-2014 to early 2016 appreciation.
"That said, the increases in interest rates and the dollar are at least in part due to improved sentiment, which can itself act as a positive for the economy."
That would be reflected in higher share prices and reduced risk spreads, offsetting some of the tightening in financial conditions, Mr Ebert said.
Another likely positive factor was the prospect for a more stimulatory fiscal policy. However, the timing and magnitude of any stimulus was highly uncertain. The BNZ and NAB had made no allowance for the US imposing additional trade barriers or changes that would significantly reduce net immigration.
As a result, the banks expected GDP growth would be modest for much of this year and strengthen towards the end of the year and into 2018 as the fiscal stimulus kicked in.
The banks were projecting there would be two further interest rate increases by the Fed this year and three next year but there was a risk of a more aggressive tightening.
"With the unemployment rate already below the Fed’s longer-term level, it is possible the Fed will react quickly to any fiscal stimulus once it is announced, depending on how concerned it is about getting behind the curve," Mr Ebert said.
At a glance
• Confidence at pre-GFC levels
• Manufacturing activity rises for fourth month in a row
• Resident investment set to grow
• Unemployment below Federal Reserve estimates
