If the US economy grows 3% in the June quarter, as is largely expected, this will represent the second straight quarter of high growth in the face of an equally large contraction in government expenditure. Government expenditure contracted 7% in Q4 2012 and 4.1% in Q1 2013. In other words, this suggests the US consumer is back to spending again; gross private domestic investment rose 12.3% in Q1 as compared to just 1.3% in Q4. As for Q2, a dramatic change in US accounting to take into account components such as film royalties and spending on R&D of the type, say, Apple does to produce the iPad, is expected to lead to the boom as billions of dollars of corporate spending will now enter into GDP accounting.
The data, including that likely for Q2 2013, however, masks some obvious weaknesses and, apart from being below consensus expectations, shows the recovery continues to be a hesitant one. Net of inventories, for instance, Q1 growth was 1.5% and therefore weaker than the 1.9% in the previous quarter. The question then is whether the inventory rise will sustain in the future; the sharp rise in consumption expenditure also suggests some tempering in future. The Markit flash PMI for US manufacturing out last week fell to its lowest level in the last 6 months; ditto for the rise in new orders, though the rise in export orders picked up somewhat.
Across the world, China’s PMI of 50.5 in April was lower than 51.6 in March, suggesting a near-stagnation. While France has seen a bit of an upturn, German PMI slipped to a contractionary 47.9, suggesting the periphery’s problem was getting more centralised. For Europe as a whole, the sub-50 PMI indicated a contraction for the 19th time in the past 20 months and new business fell for the 21st successive month with the rate of contraction accelerating for the 3rd month in a row. The long and short of the problem is that, with debt levels rising to the levels they have, growth in OECD countries remains volatile, never mind if the Reinhart Rogoff view of a growth cliff coming into play at 90% debt-to-GDP levels has been proved to be incorrect. According to the IMF’s latest Fiscal Monitor, given the levels of adjustment the US needs to make, it needs to cut its primary deficit by around 0.9% of GDP each year till 2020. Countering the contractionary impact of this means an extraordinary rise in growth in other spending including that of consumption as well as private investment. Right now, that doesn’t seem to be happening despite the one-off boost that including Apple-type R&D expenses in GDP will get from the June quarter onwards.