Research Dept. News
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Monthly Report, num 335 - May 2010
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International review - United States
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The United States: consumers take a step forward
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The United States is recovering thanks to consumption and capital goods investment.
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The US economy looked vigorous in the fourth quarter and this positive tone is expected to continue in the first quarter of 2010. The star of these first few months of 2010 is private consumption, which could be growing at a rate of around 3%. The expectation of robust growth is backed by optimistic business sentiment, suggesting that the advances made in capital goods investment will continue. However, there are still some elements of doubt. The upswing in consumption for the start of the year is due to a more moderate savings rate, as a result of a lower aversion to risk, rather than to higher income, which is conditioned by a labour market that is only very slowly moving towards recovery. The real estate market isn't very close to coming out of the tunnel either, while the deleveraging of household finances must continue. Household debt at the end of 2009 stood at 122.7% of disposable income, seven points below the record high of December 2007 but twenty above its long-term level. Consequently, although there may be vigorous growth in 2010, the medium-term outlook is still one of modestly-paced expansion.
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Retail sales speed up.
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The latest demand indicators are consistent with this recovery in private consumption. Retail sales, without cars or petrol, speeded up in March, up 4.4% year-on-year, the highest since the end of 2007. Consequently, after these three months of upswing, and having discounted the effect of price variations, retail consumption is close to its pre-crisis level of December 2007. Consumer confidence was still quite far from the rise experienced in consumption, affected by base variables such as high debt and the continued high unemployment. Consequently, in spite of its increase in March, the Conference Board index was still at a low level, confirming its role as a delayed indicator in recoveries.
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Entrepreneurs reinforce their increasingly optimistic view thanks to good corporate results.
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Business sentiment is still clearly more positive than consumer confidence. While, in principle, the fact that the non-financial sector is tackling the crisis with more moderate debt levels than that of banks and families has helped to boost business confidence, the good corporate results in the first quarter of the year have reinforced this optimistic perception. Consequently, the business sentiment index of the Institute for Supply Management for manufacturers in March rose to 59.6 points, a level befitting growth rates of more than 4% for the economy as a whole. For its part, industrial production continued to recover in March, although slowing down somewhat compared with its dynamism at the beginning of the year. With a similar trend, industrial capacity utilization was still a little above 73%. In spite of the good tone at the start of the year, both indicators are still 10% below the levels of December 2007.
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Housing is still weak due to excessive supply that is being swollen by mortgage foreclosures.
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The real estate market will continue to be weak for most of 2010. The key still lies in the large number of foreclosed mortgages, leading to an excessive supply of housing. The Case-Shiller index for housing prices fell by more than 30% between the middle of 2006 and April 2009. Since then, we can talk more of stabilization than recovery. With these drops, the price of many homes has fallen below the outstanding debt, an incentive to stop meeting the mortgage payments and give up the property. These are the so-called walkaways since, in the United States, any outstanding debt on an unpaid mortgage is totally written off once the property has been given over to the creditor. To stop this from happening, Obama's administration is working on legal provisions that reduce the outstanding capital in mortgages where this is more than 120% of the property's market value, but it is still not clear how these will be applied or the effect they'll have. The consequence is that activity continues to be below the minimum levels. The number of new homes started rose in March but these are still stuck at little more than a third of the average prior to the last real estate bubble.
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The labour market bottoms out but recovery will take some time yet.
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The labour market showed encouraging signs in March with the net creation of 162,000 jobs, the best figure for the last three years. However, the unemployment rate was still 9.7% and it doesn't look like improving significantly until the end of 2010. The problem is that the job losses caused by this recession have been the highest since 1945, and by a long chalk. It will be difficult for the unemployment figures to fall for two reasons. First, the proportion of long-term unemployed, the most difficult people to relocate, is double that of the 1983 recession, when the unemployment rate was at similar levels to today. The other difficulty lies in the large number of discouraged workers and involuntary part-time workers, who might absorb any growth in the demand for labour as the recovery progresses.
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The CPI rises 2.4% and the core CPI a moderate 1.2% due to the low utilization of production capacity and rent.
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The prolongation of the low utilization of production capacity for production is helping to keep prices stable, and substantial inflationary tensions are unlikely to appear in 2010. This gives the central banks some room for manoeuvre to maintain expansionary policies, even while draining the system of its liquidity. Consequently, the general consumer price index (CPI) rose 2.4% year-on-year in March, while the more significant core CPI, the general index without food or energy, continued to moderate its growth to 1.2% year-on-year. However, this slowdown is partly due to falling rental prices attributed to home owners. Without this component, core inflation rose by 2.4% year-on-year, somewhat more in line with the fundamental trend in prices.
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The February trade deficit for goods and services was 39,704 million dollars, 2,752 million more than the previous month. Almost the whole decline occurred in the balance that excludes oil and its derivates. The recovery in exports eased off while imports continued to advance thanks to lively domestic demand. If private consumption and investment continue to expand, the deficit should go on rising over the coming months, but without interrupting the slight corrective trend in the trade imbalance started at the end of 2006, which can be seen if we exclude the effects of oil.
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