US: Cyclical uptick in disguise – HSBC

The research team at HSBC suggests that the US Q1 slowdown is temporary as the ISM indices point to bounce in Q2 GDP, and HSBC still see 2017 GDP growth at 2.3%.

Key Quotes

“Growth on the rise, inflation under control

• We anticipate a 2.3% expansion in GDP in 2017, up from 1.6% growth last year. The economy appears to be getting off to a slow start this year, with GDP in Q1 likely to be below trend. We believe the apparent slowdown is temporary, partly reflecting seasonal issues, and expect that growth will pick up over the rest of this year.
• The improvement in various ISM indicators is one reason why we think GDP growth should rebound in Q2 after a sub-par performance in Q1. The ISM new orders index has increased even more strongly than the overall index, suggesting that manufacturing firms are seeing a pickup in customer demand. Importantly, the ISM employment index has risen sharply, indicating that firms have more confidence in the sustainability of the current upturn in activity. 
• The fall in the unemployment rate to 4.5% in March shows that labor market conditions continue to improve. At the same time, there are still some remaining signs of slack, reflected both in the number of part-time workers who want to work full-time and in the relatively long length of average unemployment. If the degree of labor market slack is a bit higher at today’s 4.5% unemployment rate than it was when unemployment was at 4.5% in 2007, then there is less risk that inflation will accelerate as the year goes on. Our forecast is for the core PCE price index to rise about 1.7% this year, basically unchanged from the inflation rate recorded in 2016.”

“FOMC to work out balance sheet plan

We expect that the Fed will raise the federal funds rate 25bp at both the June and September FOMC meetings this year. After that, we expect the FOMC to turn its attention to unwinding some of the quantitative easing (QE) put in place from 2009 through 2014. Reversing some portion of QE through the disinvestment of Treasury and MBS securities will be another form of tightening monetary policy. It will also substitute for further increases in the federal funds rate, at least for a while.”