1. Page 1 of 2
Economic Commentary
QNB Economics
economics@qnb.com.qa
May 4, 2014
The US Economy Is On a Tight Rope Between Recovery
and Policy Tightening
The US economy remains balanced on a tight
rope between higher growth and tighter
policies and this was reflected in the GDP
figures for the first quarter of 2014, which
were released last week. While the headline
number showed the US economy growing by
0.1% in Q1 on an annualized basis, well below
consensus expectation of 1.2% possibly owing
to temporary factors such as bad weather, a
deeper look at the numbers helps reveal the
underlying drivers of growth. Overall, we
expect growth to remain below 2.0% in 2014
as tighter macroeconomic policies are likely to
outweigh the recovery in the private sector.
An important factor in US GDP growth for the
last couple of years has been the stance of
macroeconomic policy. Following the 2008
crisis, US policymakers responded aggressively
on the monetary side by slashing interest rates
to near zero and embarking on an
unprecedented program of Quantitative Easing
(QE); and on the fiscal side introducing a
stimulus package. However, fiscal policy began
to tighten in 2012-13, leaving monetary policy
to do the heavy-lifting on its own. This
introduced a fiscal drag on growth as the
government spent less and introduced more
taxes.
Fiscal Drag: Fiscal Policy Contribution to Real
GDP Growth
(%, 2008-14)
Sources: Moody’s Analytics and QNB Group analysis
In 2013 for example, the fiscal drag was
estimated to be around 1.5% of GDP. Despite
that, real GDP grew by 1.9% suggesting strong
underlying growth from the private sector. If
the private sector continues to perform
strongly in 2014, when the fiscal drag is
projected to be only around 0.5%, then we
should expect above-trend growth. But is the
private sector likely to continue its
performance?
Two items are worth considering. The first is
the growth of consumer spending, which
accounts for almost 70% of US GDP. This was
directly impacted by the fiscal tightening in
2013 as consumers faced a USD200bn payroll
and income tax hike, lowering the growth rate
of their disposable income. As this effect
disappears in 2014, this should provide
positive impetus to the economy. Moreover, as
labor market conditions improve and
household wealth increases, this should add
further tailwind to consumption growth.
The second important item is the housing
market. This has favorable fundamentals as the
excess supply of housing built prior to the
crisis in 2008 has been largely unwound. As a
result, the market saw a strong recovery in the
first half of 2013 only to experience a reversal
following the 100 basis point increase in
mortgage rates after the US Federal Reserve
announced its intention to taper the QE
program. More recently, it has shown renewed
signs of weakness as new home sales declined
by 14.5% in March 2014. It remains to be seen
whether housing will drive or drag private
sector growth going forward.
Notwithstanding some positive signs in the
economy, a significant downside risk for the
rest of the year is the impact of the current QE
tapering and the possible early increase of
short-term interest rates. If this were to
manifest itself through higher long-term bond
yields and, consequently, higher mortgage
rates, this could further weaken the housing
market and the construction sector as it did in
the latter half of 2013. It would also affect
-2
-1
0
1
2
3
2008 2009 2010 2011 2012 2013 2014

2. Page 2 of 2
Economic Commentary
QNB Economics
economics@qnb.com.qa
May 04, 2014
consumers through wealth effects by lowering
equity and housing prices. If these effects
prove to be large enough, weaker private
consumption and investment could lead to
below-trend growth even as the government
reduces its fiscal drag.
Overall, the US economy is walking on a tight
rope between an incipient recovery and a
tightening of macroeconomic policies. If
private sector activity continues to grow
rapidly, despite the fiscal drag and tighter
monetary policy, real GDP growth could reach
2.0%-2.5% in 2014. However, the risk that QE
tapering derails this momentum is significant,
suggesting a lower growth rate is likely to
materialize.
Contacts
Joannes Mongardini
Head of Economics
Tel. (+974) 4453-4412
Rory Fyfe
Senior Economist
Tel. (+974) 4453-4643
Ehsan Khoman
Economist
Tel. (+974) 4453-4423
Hamda Al-Thani
Economist
Tel. (+974) 4453-4646
Ziad Daoud
Economist
Tel. (+974) 4453-4642
Disclaimer and Copyright Notice: QNB Group accepts no liability whatsoever for any direct or indirect losses arising from use of this report.
Where an opinion is expressed, unless otherwise provided, it is that of the analyst or author only. Any investment decision should depend on
the individual circumstances of the investor and be based on specifically engaged investment advice. The report is distributed on a
complimentary basis. It may not be reproduced in whole or in part without permission from QNB Group.