Industry Crib Sheet: Consumer Spending Buoys Q4 GDP

March 31, 2014

China's Manufacturing Slump Deepens in March

Global Microgrid Growth Set to Take Off After 2015

The U.S. economy grew by 2.6 percent

in the fourth quarter of last year, according to a third and final revision by the Department of Commerce, and the nation finished 2013 with a GDP growth of 1.9 percent, compared with 2.8 percent in 2012.

The fourth-quarter rate was slightly better than the 2.4 percent second estimate by the Commerce Department, buoyed by the best consumer spending pace in three years as well as exports and capital investments by businesses. Still, the figure indicates that the U.S. economy slowed significantly after September last year, and many analysts are predicting that first-quarter growth will be similarly soft at around 1.5 to 2 percent, after a harsh winter chilled industrial activity and job growth.

Business inventory accumulation and industrial production fueled rapid third-quarter growth last year, and the private sector is still working off stockpiles heading into the second quarter. But corporate spending strengthened to a 5.7 percent pace in the fourth quarter upon a double-digit (10.9 percent) increase in equipment investment. Recent factory orders data also is suggesting businesses are coming back in force with improving weather.

Richard Cope, chief executive of NanoLumens, a supplier of retail video displays, told Wall Street Journal

that businesses are "choosing to invest their capital in hardware, rather than hiring" and that "investing in technology is likely to have better effect on sales than hiring."

Hiring growth softened considerably in December and January, and businesses remain flush with cash. U.S. corporate profits in the fourth quarter were 6 percent higher than the same quarter in 2012, and after-tax profits increased to $1.9 trillion in the three-month period.

"Companies are continuing to squeeze productivity gains out of existing workforces," economist Dan North remarked to WSJ.

Even with the 9.5 percent fourth-quarter jump in foreign exports by American companies, consumer spending proved to be the chief economic driver late last year because it accounts for two-thirds of U.S. economic activity. Consumer spending increased 3.3 percent in the fourth quarter, but much of household take-home pay appears to have gone to utilities amid cold winter temperatures, rather than to retail stores.

Services spending leaped by 3.5 percent in the fourth quarter after a marginal 0.7 rise in the previous quarter, while durable goods spending rose only 2.8 percent after a 7.9 percent third quarter. While advance Commerce data shows only a 0.3 percent rise in all consumer spending in February after a 0.2 uptick in January, some observers think there is pent-up retail demand as warmer months approach.

Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ, said he expects a spring rebound in retail spending will boost second-quarter GDP, in a Reuters report


The biggest drags on fourth-quarter GDP output were housing investments, which dropped drastically by 7.9 percent, and federal spending, which fell by 12.8 percent. Defense spending plummeted by 14.4 percent in the quarter.

There remains little price inflation. The price index for consumer spending increased 1.5 percent in the fourth quarter. The Reuters report noted prices for February edged up 0.1 percent for the second straight month in February. Inflation remains below the Federal Reserve's 2 percent target that spurs loan activity. Interest rates are expected to remain low.

China's Manufacturing Slump Deepens in March

China's manufacturing sector has hit an eight-month low, according to a closely watched purchasing managers index amid growing expectations that the Chinese government may soon intervene with stimulus action for the world's second-biggest economy.

The 48.0 reading in the HSBC China Manufacturing PMI

for March was a slight 0.5 point drop from the February index. The manufacturing-specific component of the flash PMI fell by 1.5 points from February to 47.3, an 18-month low. Readings below 50 indicate retrenchment in output.

Hongbin Qu, chief economist for China and co-head of Asian economic research for HSBC, said the latest reading indicated that the "weakness is broadly based with domestic demand softening further." He added, "We expect Beijing to launch a series of policy measures to stabilize growth."

With a 7.5 percent GDP growth target for 2014, China's premier, Li Keqiang, has said the country's economy must grow 7.2 percent in order to generate 10 million jobs per year, according to a Reuters report

. He said the central government has prepared and is ready to deploy measures to stimulate China's economy. These include construction projects for infrastructure as well as boosting trade and making business financing easier.

Qu echoed those measures, expecting the government to "lower entry barriers for private investment" and "guiding lending rates lower."

Li's announcement did little to encourage other economists, including Xiao Bo, who works for a Beijing-based securities firm, who noted that Li's measures "were not new." He added, "It only means government will start work on projects that have already been approved."

"[These] comments have been said many times before," added another securities firm economist. "No matter whether you look at industry performance or economic data, things aren't looking too optmistic," said Du Changchun.

The HSBC flash PMI, which is collected in collaboration with Markit Economics, shows nearly all facets of China's manufacturing sector are dropping at a faster pace. Besides new orders from foreign trade partners, the sector's output, domestic new orders, backlogs, quantities per order, and prices are all accelerating downward. Employment continues to fall but at a slower pace in March.

Meanwhile, Markit's U.S. Manufacturing PMI

 also fell from a 45-month high in March to 55.5. The 1.6-point decline indicates domestic manufacturing activity slowed down this month but is still expanding. This was true for output, new orders, export orders, employment, and backlogs.

The PMI noted that manufacturers are playing catch-up after winter weather disruptions. The average 55.4 PMI for the first quarter was 1.6 points higher than fourth-quarter 2013, driven by greater production output and new business activity.

"Growth was not as strong as February, but that's in many respects only to be expected after last month's numbers had been boosted by the rebound from January's severe weather," noted Chris Williamson, Markit's chief economist. "The fact that the output and new orders indices remained so strong in March is very encouraging news that the sector has come through the weather-related soft patch."

Williamson said the manufacturing sector should provide "a robust contribution" to first-quarter U.S. GDP.

Global Microgrid Growth Set to Take Off After 2015

The global microgrid market is rapidly gaining prominence as supportive government policies in various countries encourage the setting up of renewable sources of energy such as wind and solar farms, according to a new Frost & Sullivan

analysis. The market in the U.S. has established a clear lead, the Mountain View, Calif.-based market research and consultant noted, primarily engaging microgrids for remote and military applications. In Europe, microgrids are viewed as a suitable option for renewable energy integration. Emerging economies in Asia-Pacific, though, present the largest market potential, as they look to counter power shortages and low grid connectivity.

Frost & Sullivan's analysis of the emerging global microgrid space estimates that there will be a sharp rise in installations from 2015 to 2020. Among the different application sites for microgrids, remote community site deployments are expected to experience the strongest and most consistent growth in the next five years. The prospect of microgrids being employed by utilities is also high, as research activities gain pace through utility networks.

"Increasing focus on renewable energy in the energy mix and its integration is lending momentum to the adoption of microgrids on a global scale," said Frost & Sullivan Energy and Environment Industry Manager Suba Arunkumar. "Uptake has been steady in various fields, including military, industrial, institutional and off-grid applications."

However, integrating microgrids into existing systems is an expensive task and remains a challenge. The proliferation of custom interfaces adds to the cost of the system. To overcome these barriers, institutions and universities across Europe are building microgrid networks for field tests and analysis. The large value chain of participants actively contributing to microgrid development will further fuel a market boom beyond 2015.

"By the same token, since a microgrid deployment involves many different participants, the scope for expansion for players across the whole value chain is immense," Arunkumar noted. "First-mover advantage will be prominent for participants venturing into the market within the short term."

Top photo credit: renjith krishnan at


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