U.S. Economic Outlook is Sound

We believe U.S. economic data supports sound conditions for the economy in 2014, with no major imbalances appearing. Some figures, weaker than expected in the first weeks of the year, are mainly the result of exceptional weather conditions. The transition towards a self-sustained recovery is supported by strengthening internal demand, driven by recovering capital expenditure and household consumption. We expect to see mixed signals coming from economic activity indicators and labor market as the economy normalizes, but we do not expect the trend in the main drivers of growth to be derailed.

Our growth estimates for 2014:

  • U.S. GDP growth of 2.8%.
  • Personal consumption estimated to grow at a moderate pace and then accelerate in the second half of the year.
  • Inflation expected to remain below 2% but step up gradually during the year.
  • Non-Residential Investments to accelerate in the second half of the year, giving momentum to acceleration in capital expenditures.
  • The Fed will continue to taper its bond buying program which will be effectively wound down by the end of 2014 if its current economic projections hold.

GDP: We expect 2.8% year-over-year GDP growth in 2014. At the end of March, The Bureau of Economic Analysis released the third and final estimate of Q4 2013 GDP, revised up to a 2.6% quarter over-quarter annualized rate (from 2.4%). Personal Consumption was revised up, too, supporting the case for progressive acceleration in consumption behavior in the second half.

Consumption: We think personal consumption will grow at a moderate pace in the first half of the year and then accelerate into the second half to a 3% quarter-over-quarter annualized growth rate, underpinned by supportive dynamics in disposable income, compensations and progressively improving labor market conditions.

Inflation: Inflation is expected to remain below 2% and gradually step up during the year, with no major spikes. According to our scenario, there are no major forces to imply faster inflation acceleration. Our forecast averages 1.6% in headline CPI (consumer prices inclusive of food and energy) in 2014 year over year, and then gradually converges towards 2% at the end of 2016.

Federal Reserve: The next meeting of the Federal Open Market Committee (FOMC) is on April 30. We expect the Fed to continue its taper of quantitative easing (QE). If the economy develops as the Fed currently forecasts GDP growth around 3% in 2014 and 3-3.5% in 2015, unemployment around 6% by the end of 2015 – we expect QE to be wound down by the end of 2014. Interest rates could then start to slowly increase during 2015 (Fed Fund futures currently project rates to slowly start to rise above the current 0.25% level in the autumn of 2015).

Government Consumption: We expect government consumption to have a null contribution to growth in 2014. Net trade will have a modest positive contribution, with exports growing 6.4% year over year in 2014 while imports will pick up due to stronger domestic demand and grow at 4.6%. Finally, company inventories which had a positive contribution to growth in 2013 and 2012, will have a negligible negative impact this year.

Housing: After a setback in the fourth quarter of 2013, home building will pick up but gradually decelerate, growing close to 4% 2014. Non-Residential investments will accelerate to around a 7% growth for the year.

GDP Contribution Sources

Potential Catalysts to U.S. Economic Growth

  • Stronger-than-expected global demand, supported by a stronger economic performance of the Euro Area could support both confidence and exports, and somewhat offset the impact from weaker growth in emerging economies.
  • A productivity pick-up, accelerating the pace of recent weak growth.
  • Stable improvements in the consumer sector balance sheet, coupled with stable income growth and progressive improvements in the labor market could support higher patterns of consumption.

Potential Risks to U.S. Economic Growth

  • A significantly stronger dollar might adversely impact the export sector by making U.S.-produced goods and services more expensive in foreign markets.
  • After years of shedding debt, the U.S. consumer might be more reluctant to spend, detracting from growth momentum.
  • Geopolitical tensions, involving directly or indirectly the U.S. could be highly disruptive for the flow of oil and for financial markets in general.

Data Source: Pioneer Investments

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About Giordano Lombardo

Giordano Lombardo is CEO and Group CIO of Pioneer Investments. Prior to his appointment as CEO in February 2015, he held the position of Deputy CEO since 2012. He has been Group CIO, responsible for global investment activities, since 2001 and has been with Pioneer's parent company, UniCredit Group, for over 20 years.
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