Research Dept. News
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Monthly Report, num 336 - June 2010
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International review - United States
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The United States: consumers lose their fear
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The United States grows by 3.0% thanks to private consumption and capital goods investment...
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Less risk aversion on the part of consumers is bolstering the recovery. For the first quarter of 2010, gross domestic product (GDP) grew by 3.0% annualized quarter-on-quarter, 2.5% compared with the same period a year ago. This stronger GDP was due to private consumption, on its own accounting for four fifths of the total growth for the quarter. The other pillar to the recovery is capital goods investment, boosted by good business confidence indicators and profits. Residential investment continues to be among the weaker components, although it is showing some signs of a slow recovery. The foreign sector also weakened growth because of a slowdown in exports and the upward pressure on imports due to domestic demand.
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...but the savings rate is falling while debt has yet to be reduced.
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Public consumption faltered again and, given the latest disturbances in debt markets, is unlikely to contribute much to growth in the coming quarters. The upward trend for 2010 has therefore been reinforced, although there are doubts as to whether the recovery will continue at its current pace. In this respect, the upswing in consumption, although resulting from a positive reversal of the risk aversion, is not so much due to greater income but rather a return to low savings rates, less than 3% of disposable income, after having exceeded 5% at the beginning of 2009. A low savings rate that makes it difficult for households to continue reducing their debt. Between March 2008 and December 2009, total household debt went from 130.1% to 122.7% of disposable income, a slightly higher level than might be considered normal, given the long-term trend. Additionally, with growth close to 3% it will be difficult to quickly reduce the high unemployment rate, in spite of the fact that the US economy has been creating jobs since early 2010.
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Retail sales accelerate while consumer pessimism falls.
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The latest demand indicators reinforce the pattern of a recovery led by private consumption. Retail sales, without cars or petrol, continued their upswing of the first quarter by advancing 5.5% year-on-year, 4.5% discounting the effect of price variations, close to their pre-crisis level. Although less convincing than retail sales, the Conference Board Consumer Confidence index, which is a delayed indicator in recoveries, advanced in April to its highest level since September 2008, the month before Lehman Brothers went bankrupt.
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Entrepreneurs are optimistic and industry continues its slow recovery.
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On the supply side, non-financial firms have been showing themselves to be one of the strong points throughout this crisis, at first thanks to their lower levels of debt compared with banks and households and, afterwards, to their rise in profits. Consequently, the business sentiment index of the Institute for Supply Management rose slightly to the level of 60.4 points in manufacturing and 60.3 points in services, in both cases consistent with the economy's strong expansion. Also on the path to recovery, albeit with a lower profile, industrial production enjoyed an upswing in April, growing 5.1% year-on-year, although the indicator is still 9% below its level of December 2007, before the crisis. Similar behaviour could be seen from industrial capacity utilization, close to 74.0% of the total, its highest percentage since the end of 2008 but still far from the historical average of 81.0%.
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Construction is showing a timid recovery but prices are still rock bottom.
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The housing market is still weak but timid signs of recovery on the supply side suggest that, in the coming quarters, it will no longer be a burden on GDP growth, although it's starting from a very low level. 672,000 homes were started in April, in annual terms, 40.9% higher than the same period one year ago but far from the typical figure for the years before the bubble, namely 1,600,000 new homes. The end of government aid for first-home buyers in April and the high number of foreclosed mortgages, both of which encourage oversupply, will continue to hinder the recovery in house prices. The Case-Shiller index for second-hand house prices had practically stagnated in February, with a rise of 0.1% compared with the month before, seasonally adjusted, and 29.9% below the maximums of 2006.
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The labour market is now creating jobs but unemployment is still close to 10%.
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The labour market continues to pick up. 290,000 net jobs were created in April, a sharp rise that takes the total gain since the beginning of the year to 573,000 jobs. However, the unemployment rate increased slightly from 9.7% to 9.9% and will only fall very slowly. Firstly, the share of long-term unemployed, who are more difficult to relocate, accounts for 45.9% of the total unemployed, double the figure in the 1983 recession when unemployment reached similar levels to the present. Secondly, the large number of discouraged workers, and of workers doing part-time work involuntarily, might absorb the growth in demand for labour as the recovery progresses.
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The CPI is up 2.2% while core inflation slows up to 1.0%.
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Inflationary tensions are fading further into the distance. Prices are thereby helping policies to boost demand but are also a warning that the recovery in demand may be more fragile than it seems. In April, the fall in energy prices meant that the general consumer price index (CPI) was lower than March's figure, seasonally adjusted, with a year-on-year change of 2.2%. Persistently low production capacity utilization continued to ensure that any rises in core inflation would also be moderate, up 1.0% year-on-year. Core inflation without the estimated equivalent of rent for owners also slowed up its progress, from 2.4% to 2.2% year-on-year.
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The trade deficit increases due to oil prices but continues to adjust.
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The foreign sector is very unlikely to make a positive contribution to the economy's growth over the coming months, given the recovery in domestic demand and the relative strength of the dollar. But on the plus side, the tendency towards adjustment appears more solid than at the start of the year. The trade deficit for goods and services in March was 40.423 billion dollars, around 1 billion above the previous month's total due to fluctuations in oil prices. However, the deficit excluding oil and derivates fell by 0.8 billion dollars, thanks to dynamic exports, which grew faster than imports in March. This good result for the non-oil balance points towards a continuation of the adjustment starting in the first quarter of 2006, when the non-oil deficit reached 3.9% of nominal GDP. After the ups and downs caused by the worldwide trade crisis, in the first quarter of 2010 the deficit fell to 1.3% of GDP.
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