New data casts doubt on US recovery

Weaker manufacturing and consumer spending numbers from America last week cast doubt on the strength of recovery in the world’s largest economy.

Steadily improving economic indicators from America have been welcomed in recent months, with fund managers drawing attention to trends such as rising employment and a strengthening housing market.

Last week the US Department of Commerce revised its estimate of fourth-quarter GDP growth from an advance forecast of 2.8% year-on-year, to 3%. The bulk of the increase came from changes to business inventories and a slight improvement in consumer spending.

However, figures published in the days following the GDP revision suggested that growth could tail off sharply after highlighting falling manufacturing activity and flat consumer spending.

The Institute for Supply Management’s (ISM) index of national factory activity dropped from 54.1% in January to 52.4% in February. This shows the pace of growth in the sector slowed following three months of gains.

Paul Dales, a senior American economist at Capital Economics, says the unexpected fall supports the opinion that “the economy is not quite as strong as recent data have led others to believe”.

February’s fall reverses about half of the gains made in the ISM index over the past few months. Especially worrying, according to Dales, is the drop in the employment sub-index as this suggests the strong rise in January’s payrolls is unsustainable.

Other official figures showed consumer spending rose by less than 0.1% in January while consumers’ real disposable incomes fell by 0.1% month-on-month.

Dales adds: “When taken together, the [ISM and consumer] figures support our view that annualised GDP growth in the first quarter may be as weak as 1%.”

Despite emerging doubts on the health of the American economy, the Federal Reserve last week appeared to quash suggestions of a third bout of quantitative easing (QE) to stimulate growth.

In his semi-annual speech to Congress, Ben Bernanke, the Fed chairman, conceded that growth “has been uneven and modest by historical standards”, but avoided hinting at intentions of additional QE.