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New U.S. jobs, but not the same old demand

U.S. employers have added more than 1.5 million workers this year, and those people are spending money. Americans bought automobiles at an annual rate of 16.7 million in July, well in excess of the annual average of 14.8 million vehicles between 2002 and 2011, according to Bank of Nova Scotia. On Tuesday, the Institute for Supply Management said its index of activity in the non-manufacturing surged to 58.7, its highest level since the gauge was created in 2008.

The ISM reading on services, including construction, induced a lot of exclamation marks as Wall Street analysts summarized the latest data, which also included a report that showed factory orders gained a healthy 1.1 per cent in June. This group of forecasters, so often burned by the halting recovery, seems to be gaining confidence that the 4-per-cent rate of annualized growth in the second quarter that the Commerce Department reported last week wasn't a fluke. There was more going on the spring than payback from the surprise contraction in the first quarter. The U.S. economy has real momentum.

But how much momentum? There is a broad agreement that the economy's rate of growth will slow from 4 per cent over the second half of the year. Economists at PNC Financial Services Group see second-half growth of 3 per cent. National Bank Financial in Montreal predicts U.S. gross domestic product will grow at an annualized 2.5 per cent in the third quarter.

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The U.S. economy accelerated out of its first-quarter slump much faster than most Wall Street analysts expected. One of the few who got it (mostly) right was Kevin Logan, chief U.S. economist at HSBC in New York. Mr. Logan predicted second-quarter growth of 4.2 per cent when most of his peers, still smarting from the unexpected depth of the first-quarter contraction, were posting conservative estimates of around 3 per cent. So what does Mr. Logan see happening over the rest of the year? Let's just say Mr. Logan won't be popular around the White House, where President Barack Obama is banking on a stronger economy to help the Democratic Party keep control of the Senate in midterm elections.

Mr. Logan released a revised outlook Tuesday and he's convinced the second quarter was as exciting as it's going to get for a considerable time to come. He says economic growth will average about 2.5 per cent for the rest of 2014 and 2015. That's only slightly faster than the 2.2-per-cent average pace of the recovery so far and lacklustre by historical standards.

The reason for HSBC's subdued forecast: consumption. Demand is stronger, but not strong enough to sustain growth in excess of 3 per cent, according to Mr. Logan. In the previous expansion, which lasted from the end of 2001 to the end of 2007, personal consumption rose by an average of 2.9 per cent a year. Since 2009, the annual increase in consumption has averaged 2.2 per cent. For Mr. Logan, that's enough to conclude that the pain of the housing bust and financial crisis still is raw. American households have lowered their debt burdens to 77 per cent of income from a peak of 95 per cent in 2008. There's reason to think many consumers will think that lower level still is too high. The average debt-to-income ratio in 2001 was 69 per cent, according to HSBC.

To be sure, that's only one person's opinion. The International Monetary Fund, which was far from cheery when it released its outlook for the U.S. last month, predicts GDP will expand 3 per cent in 2015. Mr. Logan sees only 2.6 per cent.

Regardless of who proves closer to the mark, the most important point to note is that while the U.S. economy is bank on track, it is not the same economy that sucked in so much of the world's excess production before the crisis. American consumers still are paying off their debts from that epic splurge. They are spending again, but probably have learned something that is good for stability, but bad for short-term growth: thrift.

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More


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