A Strong Third Quarter for the US Economy

The economic recovery in the United States continued in the third quarter of 2014, providing hope that the world’s largest economy can increasingly become an engine for more widespread global growth in late 2014 and in 2015.  While the US economy’s performance was strong, there were some signs for concern that could hold back growth in the US in the coming months.  Nevertheless, the overall outlook for the United States economy is overwhelmingly positive, as there is still room for improvement in most economic sectors in the US.

In the third quarter of this year, the United States economy expanded by 3.5% quarter-on-quarter (2.3% year-on-year), in line with our forecasts.  This was the fourth time in the past five quarters in which quarterly GDP growth in the US was at least 3.5% (the winter-hit first quarter of 2014 was the exception).  Growth was driven by the continued strength of US exporters, despite the continued weakness in key export markets in Europe and Asia.  In addition, government spending was also much higher in the third quarter, boosted by an increase in defense spending.  On the downside, consumer spending grew by just 1.8% in the third quarter, well below expectations.

Looking ahead, economic growth rates in the United States are forecast to approach 3.0% on a year-on-year basis in late 2014 and in 2015.  This growth will be driven by higher levels of consumer spending as US consumers have held back on spending so far this year, despite falling unemployment rates and higher levels of consumer confidence.  Furthermore, while a strong US dollar could hinder export growth, export demand in key markets in Asia and Latin America is forecast to rise, allowing US exporters to continue to perform well.  Finally, government spending levels are forecast to also rise, particularly if the hoped-for increase in infrastructure spending will be realized in the near future.

Despite the fact that the outlook for the US economy is mostly positive, there are still a number of threats to growth in the US.  First, export growth could be jeopardized by lingering weaknesses in key export markets in Europe, Asia and many emerging markets, particularly if the US dollar continues to strengthen against other currencies.  Second, growth could be held back over the near-term due to a need to reduce inventories in many sectors of the US economy that were built up in recent months.  Third, while the US does not face the deflationary pressures that are in place in Japan and the Eurozone, inflation rates are nevertheless too low for comfort and could fall further if the US dollar continues to strengthen.  Finally, the threat of political gridlock in Washington could dampen business and investor confidence in 2015 and this could prevent the US from growing as fast as it could.