Strong household spending and robust exports kept the U.S. economy on solid ground in the fourth quarter, but stagnant wages could chip away some of the momentum in early 2014. Gross domestic product grew at an expected 3.2 percent annual rate. The economy was firing on almost all cylinders as 2013 came to a close, a far stronger performance than had been anticipated earlier in the quarter and welcome news in light of some drag from October’s partial government shutdown.
Consumer spending rose 3.3 percent, highest since fourth quarter of 2010, was the main driver of fourth-quarter growth, but there was also a strong boost from trade. Business investment also lent support as did the restocking of warehouses, but not at the same scale as in the third quarter. Wage growth has been listless as the economy deals with slack in the labor market. Consumption in the fourth quarter came at the expense of saving. The saving rate slowed to 4.3 percent in the fourth quarter from 4.9 percent in the prior period.
A run-up in mortgage rates, which held back home sales and renovations, saw residential investment falling for the first time since the third quarter of 2010. Home sales have been slow in recent months and that trend is likely to persist for a while as the market adjusts to higher loan rates. Home sales in 2013 were the highest since 2006.
The euro zone’s private sector started 2014 in much better shape than expected, with stronger growth across the region marred only by a continued downturn in France. Eurozone Composite Purchasing Managers’ Index (PMI), which gauges business activity across thousands of companies and is seen as a good guide to economic health, jumped to 53.2 in January from 52.1 last month. Germany’s composite PMI rose to a 31 month high. France’s PMI contracted.
New orders rose across the bloc for the sixth month, with the sub-index matching December’s 30-month record of 52.2, indicating the PMIs might rise higher next month. The upturn was broad based, with growth in both the services and manufacturing industries, and the data comes after Ireland and Spain saw strong demand for their bonds this month, while European shares climbed to fresh 5-1/2 year peaks on Tuesday as investors become increasingly bullish.
The British economy is now the envy of the rich world. On January 21st the IMF predicted growth of 2.4% in 2014. Among large advanced economies only America is expected to do better. Firms are rushing to take on staff, sending the unemployment rate tumbling—and creating a conundrum for the Bank of England.
China and Japan are eyeing each other dangerously. As long as China keeps trying to chip away at Japan’s sovereignty, risks will remain high. The territorial dispute between China and Japan is worrying. Commentary from both sides is strengthening the hand of hawks in both camps. Japanese ‘proactive pacifism’ and China’s ADIZ is a gambit by the People’s Liberation Army to extend its regional influence. Fear is that Beijing’s belligerent assertion is a sign of things to come from China. Southeast Asian nations are not persuaded by China’s rhetoric about its ‘peaceful rise.’ They are relieved of the US rebalance of its military and diplomatic focus toward Asia. One positive sign is that trade between Japan and China is almost back to the level it was 18 months ago. People to people exchanges are picking up, too. Unfortunately, there exists NO hot-line between the two.