Research Dept. News
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Monthly Report, num 318 - November 2008
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International review - United States
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United States: drastic drop in consumption
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US GDP down in third quarter confirming weak cycle that could be long-lasting.
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The US gross domestic product (GDP) grew by 0.8% year-on-year in the third quarter and in quarter-on-quarter terms annualized the economy dropped by 0.3%. At this time, the weak point in economic activity is what until recently was its main driving force, private consumption. In the third quarter this dropped by 3.1% in quarter-on-quarter terms. In keeping with the current state of weakness, the drop in consumption in absolute terms has taken away from growth the very same energy that was boosting it in 2007.
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Weakness in private consumption for some time.
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Another factor cutting the strength of total growth (0.5% in quarter-on-quarter terms annualized) is capital goods investment which dropped by 5.5% in quarter-on-quarter rate annualized. On the one hand, investment in construction took off the same figure from growth of the economy but, what is more relevant, is that it broke with its course of stabilization dropping by 19.1% quarter-on-quarter annualized. Faced with this drop in domestic demand, the foreign sector continues to be the component giving support to economic activity but it is lacking in strength. Whereas exports offered only half the drive seen in the previous quarter (a result of the weakness of world demand), imports did not drop as much so that the contribution to economic growth was cut by half. With this weakness in private consumption, followed by that in investment, the United States may find itself at the start of a recession with prospects for 2009 pointing to practically nil growth, a low profile that could extend into 2010.
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Consumer pessimism reaches all-time lows.
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Supporting this scenario of prolonged slowdown is consumer sentiment, whose indicator most closely followed is the consumer confidence index of the Conference Board dropped in October from 61.4 points to 38.0 points, an all-time low in the 40-year existence of this indicator. Retail sales in September also stood on negative ground. Excluding cars and petrol, the most volatile components, retail consumption showed two consecutive months of decreases that put year-on-year growth at a slim 1.5%. Discounting price changes this turns out to be a drop of 0.7%. Furthermore, car sales in the same period showed a drop of 18.5% year-on-year. Considering these factors, sales managers are predicting a poor buying season over Christmas.
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Business executives see downturn scenario with lower price pressures.
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The business outlook reflected in the business activity index of the Institute for Supply Management in September showed two different pictures over the short term. On the one hand, the manufacturing index dropped from the 49.9 points level to 43.5 points, which is quite a long way from the balance level of 50.0 points when there are as many optimistic responses as pessimistic ones. The services index rose slightly to 52.1 points. Nevertheless, the differences end there seeing that in both cases there was a clearly downward trend that was better defined than in previous downward cycles. In both cases, there was a continuation of the moderation in price indices and, in manufactures the sharp worsening of the new orders component still held.
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The housing sector is still unable to see light at the end of the tunnel which might help domestic demand whether through construction spending or, through the wealth effect, might improve consumer prospects. Latest supply indicators show bigger drops. As a result, housing starts dropped by 31.1% compared with the same period last year. Pointing in the same direction, building permits (to some extent an early indicator of starts) were down by an even sharper 37.0%. The level of housing starts is difficult to recover given the large number of houses unoccupied and repossessions so that there is no demand for new houses and, in this respect, the drop in demand is acting as an adjustment mechanism.
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Housing market remains weak but drop in sales now hitting bottom.
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On the demand side, real estate prices continue to reduce the perceived wealth of many consumers and in August the Case-Shiller index continued to drop with a cumulative decrease of 22.0% compared with the high in June 2006. The best news from the sector in September was that existing housing sales (90% of the total) were up by 1.4% year-on-year, something that has not happened since November 2005. Apart from this specific figure, housing sales are now showing a tendency to stabilize, if not to recover, which indicates that the adjustment through the volume of sales has now ended. Now we must wait for the moment when the price adjustment comes to an end.
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Labour market continues to worsen while inflation drops to 4.9%.
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A fundamental aid to the recovery of real estate prices and consumption in general is the labour market and here the signs of weakness are continuing. The downturn in the labour market continues to grow worse. September saw the loss of 159,000 jobs which puts the total number of jobs lost this year at 760,000. In line with this sombre picture, the unemployment rate held at 6.1% of the labour force, with a tendency to keep increasing, whereas wages, in spite of a very small gain in September, have lost 1.9% of purchasing power in one year and are running at levels in 2001.
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Trade deficit puts off awaited correction.
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With regard to prices, the September consumer price index (CPI) rose by 4.9% year-on-year whereas the key variable, the underlying component (the general index less food and energy) held at 2.5%.
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In the foreign sector, now acting as an aid to growth, the trade balance in goods and services showed a deficit of 59.14 billion dollars in August. This was an increase of 6.9% in spite of the moderation of oil prices because of the worsening of the trade balance excluding oil and derived products. The correction in commodity prices, especially in the case of oil, should brighten prospects for the foreign sector over the short term although the weakness in world demand is acting in the other direction.
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