U.S. Economic Growth Remains Solid Despite Not Keeping Pace

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The U.S. Bureau of Economic Analysis released its preliminary estimate of 4th quarter results and it shows that economic growth slowed considerably from last quarter’s torrid pace of 5 percent to 2.4 percent.  This estimate should be viewed with caution because it is based on incomplete data and further revisions will be released in the future.  Having said that, it still remains a decent figure and is more in line with what we experienced throughout the year.  If this quarter’s growth were to receive a grade, it would be C+ without a curve, but an A with a curve.

What to smile about 4th quarter growth:

  • Consumer spending picked up, which can be explained by low gas prices that freed up more money to spend in other areas.
  • Business spending also grew, particular in intellectual property and residential.

What to frown about 4th quarter growth:

  • A weakening global economy and resurgent U.S. economy drove down net exports.
  • Federal government spending contracted by the largest margin of the year.
  • The pace of equipment spending dropped and overall growth in fixed investment and structures grew at a slower rate.

Overall, we should still be encouraged by these numbers.

Global Economic Forecasts Downgraded

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The International Monetary Fund has downgraded its economic forecast for both emerging and advanced nations.  Overall, they still expect the global economy to rise by 3.1 percent, which would be the same rate as 2012.  Due to the catch-up effect, emerging countries wlll continue to outpace advanced countries.  Emerging countries are expected to see a slight uptick in 2013 to 5 percent from 4.9 percent.  On the other hand, advanced countries are projected to maintain their pace of 1.2 percent, which is low figure.  We would like to see advanced countries growing around 3 percent.

As for the emerging countries, Asia continues to be a leader.  China and India are still experiencing high growth rates at 7.8 percent and 5.6 percent, respectively.  However, concerns remain due to potential inflation risks in both China and India.

As for the remaining emerging countries, they are facing pressures from lower prices of commodities as global demand declines.  That is particularly a concern for Brazil and Sub-Saharian Africa, which are both rich in natural resources.  While Brazil is more adversely affected with a growth rate that is lower than average for emerging countries at 2.5 percent, Sub-Saharian Africa is still expected to edge the rate of other emerging countries at 5.1 percent.  This is occurring despite South Africa’s relatively low rate of 2 percent.  They will be challenged with lower demand for exports and concerns of maintaining political stability.

What is holding down the growth of advanced countries is Europe.  The Euro area is projected to contract by 0.6% in 2013, which is the same rate of decline as 2012.  In particular, Italy and Spain are struggling with negative growth rates of 1.8 percent and 1.6 percent, respectively.  Germany is faring better than most of Europe, but not by much with anemic growth of 0.3 percent.  This is attributed to the pains of an imperfect monetary union where exploding debt in Southern Europe is dragging down the whole region.

While not technically part of the Euro area, the United Kingdom is faring relatively well, though its growth rate is modest.  As for this year, they are projected to grow at 0.9 percent.

Referring to the G-7, which includes Canada, France, Germany, Italy, Japan, United Kingdom, and the United States, Japan is projected to grow the fastest.  After slumping to -0.6 percent due mainly to the tsunami, they have steadily grown since then and are projected to be at 2 percent in 2013.  Recent efforts to spur economic growth through fiscal and monetary expansion are expected to pay off with higher growth.

When looking to North America, Canada and the U.S. are expected to grow at similar rates at 1.7 percent.  Canada’s economic forecast has actually brightened somewhat due to improved prospects in the U.S.  However, they are hampered by high household debt and a slowdown in housing.  On the other hand, the U.S. is benefiting from a stronger housing market and greater consumer demand, though the effects of sequestration and higher payroll taxes remain a drag.

In conclusion, Europe’s problems are proving to be contagious to the rest of the world.