Research Dept. News
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Monthly Report, num 304 - July 2007
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International review - United States
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United States: more growth, but real estate market remains at thread
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United States hoping to recover good economic state after weak half-year.
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The United States economy now is not only riding the storm successfully but, following publication of latest indicators, seems to have the prow aimed at a growth horizon with inflation relatively under control. And, while growth of gross domestic product (GDP) in the first quarter ended up a poor 0.7% quarter-on-quarter in annual terms, for the second quarter it its expected to go well above 3%. The biggest growth factor, however, is still coming from consumers helped by a labour market that functions at a good pace. Inventories are at low levels so that it may be expected they will go up while the expected drive in exports and investment is still to be seen. In spite of this reassuring scenario, risks still remain and the bad genie of the real estate market has not yet been brought to bay.
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Consumers keep on doing well...
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In this context, retail sales in May, excluding the highly variable figures for cars and petrol, grew by 4.5% year-on-year. This may stay below the growth rates seen in the boom months at the end of 2004 but it shows a level of resistance with increases of around the 5% it has shown in recent months which has been more solid than expected. This strength has been obtained in spite of the fact that these variable components (cars and petrol) have also been gaining strength in recent months, which means an adverse effect on budgets for other purchases. In keeping with this trend, the consumer confidence index published by the Conference Board is maintaining an upward trend which, nevertheless, has been easing off after failing to come close to the high in the previous growth cycle. The help from the labour market remains considerable with some 157,000 new jobs created in May and an unemployment rate at only 4.5% of the labour force.
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...as well as businesses, up to now.
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Largely as a result of the strong consumer drive, business executives are now seeing things more clearly. The business sentiment and economic activity index put out by the Institute for Supply Management (ISM) for May showed significant increases that were rather unexpected. In manufactures, in spite of the low level of industrial production, the index went to the 55.0 points level and in services, the increase was even sharper at 59.7 points. These figures were well above the 50 which indicates there were more optimists than pessimists. New orders, especially for exports, and prices were the factors showing most strength while inventories showed up as the weakest. Utilization of industrial production in May stood at 81.3 points, a high level but lower than the peaks reached last summer and also below average growth in the Nineties so that price pressures should be moderate.
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Core inflation moderates to 2.3%.
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The Fed and the government bond market seem less concerned about the slowdown in economic activity than by inflation, in contrast to just a few months ago. In view of the trend in prices, the former should be more certain than the latter. The consumer price index (CPI) for May rose by 2.7% year-on-year thus showing a slight rise over April. Core inflation, the general index excluding the volatile headings of food and energy, slowed to 2.3% and marked up a downward trend. Clearly in this direction, the underlying CPI excluding housing rentals (which are more closely linked to possible overheating of the production fabric), increased by 1.2%.
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Real estate market still not recovering although for now prices holding up.
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In view of this picture, it seems that the US economy is not presenting major problems. Nevertheless, existing risks are considerable. Firstly, the real estate market is still far from getting onto a recovery course. In April, existing house sales dropped by 10.7% year-on-year putting end to the weak recovery noted in February. Neither did tendering for public works or housing starts respond. The main indicator was housing prices, given that a mortgage based on these prices and the wealth effect, could seriously affect private household consumption that makes up more than 70% of economic activity. For this reason, the fact that up to now price decreases have been minimal is the most positive factor so far. But it is necessary to be cautious given the sharp increase in the number of properties for sale which in one year has grown from 1.3% to 2% of occupied housing stock.
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Price of imports, excluding oil, up 10% since end of 2001.
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Secondly, there is the foreign sector in deficit. The trade balance is negative. In the past 12 months up to April it went to 742 billion dollars. This amount is equivalent to 5.5% of nominal GDP although it has been moderating from the 6.0% seen in the summer of 2006. For now, the trade deficit is not in any difficulty in terms of financing. There are two positive factors associated with the deficit that could be turning around. The desire of the Asian countries to keep on piling up dollars and buying US government bonds could dry up with a possible rise in long-term interest rates. Should any thing come of pressures for revaluation of the Chinese currency, the renmimbi, this could more likely bring about a rise in interest rates than a correction in the trade deficit which has improved little since the dollar began its downturn. Secondly, up until now the non-energy trade deficit has served to import deflation, that is to say, buying products at a very good price (especially from East Asia) and in the process put a hard brake on possible inflationary pressures. This may also be coming to an end. Between 1995 and the end of 2001 the deflator for imports excluding oil dropped by nearly 17% but since then it has gone up by close to 10%. With things as they are, the urgency for correction of the trade deficit could begin to be greater than it has been up to now.
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