Research Dept. News
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Monthly Report, num 349 - September 2011
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International review - United States
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The United States: anaemic growth in spite of aid
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The United States disappoints and grows a modest 1.5% in the second quarter.
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In August, developments in the world's leading economy were affected by the realization that growth is weaker than initially believed and by US public debt being downgraded by the ratings agency S&P. Of the two, the real fundamental problem is weak growth, which has led the Federal Reserve (Fed) to explicitly announce that it will keep interest rates at their current level until at least mid-2013, without ruling out the possibility of a third round of quantitative easing.
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The downward revision of the first quarter reduces the growth forecast for 2011 to clearly below 2%.
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After the revisions, since July, of the national accounts by the Bureau of Economic Analysis, growth in gross domestic product (GDP) for the second quarter was 0.2% quarter-on-quarter, 1.5% year-on-year. This modest rise, together with the drastic downward revision of the growth figures for the first quarter from the previously announced rate of 0.5% to a minimum of 0.1% quarter-on-quarter, means that the forecast for the whole of 2011 is around 1.7% in the best of cases. We should remember that, at the beginning of this year, the consensus for 2011 exceeded 3.0%, giving an idea of the change in macroeconomic scenario taking place over the last few months. The new figures also show that the recession was more severe than previously estimated.
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Fiscal and monetary stimuli aren't managing to revive consumption.
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The corollary is that private consumption, the main engine of growth in the years prior to the crisis, is practically stagnant, although the United States has been the economy, among all advanced countries, that has enjoyed greater fiscal and monetary stimuli. Given this situation, there is the real likelihood of a double-dip recession. This pessimistic view is supported, firstly, by the persistence of growth rates under 2.0% and a high unemployment rate that historically pushes growth down. Secondly, fiscal policy has gone from stimulating to hindering activity due to the savings imposed by budgetary restrictions in order to tackle the public debt accumulated, which will almost certainly exceed 100% of GDP in 2011. In this respect, the agreement reached between Democrats and Republicans on 2 August to raise the legal debt ceiling and avoid a suspension of payments entails significant cuts in public expenditure in the medium term. As part of this agreement, a bipartisan committee must make proposals for savings within the different budgetary items.
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However, recession is not our main scenario as, in this second half of the year, private consumption might have two considerable supports. First is the falling price of oil which, although this drop has been less than expected, should end the year below the average figure of 117.15 dollars per barrel for the second quarter. If the price remains within the current range of 105-110 dollars per barrel, this will give a shot in the arm worth approximately 0.4% of GDP, as cheap petrol would release part of household income for other items of expenditure.
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Low growth hinders fiscal consolidation.
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The second factor to take into account is the gradual fall in household debt, which has been and continues to be the main burden threatening the recovery in private consumption. The gross debt of households has gone from a peak of 130.2% of their disposable income in September 2007 to 115.7% in the first quarter of 2011. This fall is largely due to inflation, which helps to increase the nominal value of disposable income and has accounted for almost 40% of the reduction in indebtedness in terms of household disposable income since the end of 2008. This lower debt should provide another boost for consumption. In this respect, retail sales figures for July were somewhat better than expected, with a year-on-year growth of 4.6%, not including automobiles or petrol, and with a revision upwards of the figure for June, indicating that private consumption still has resilient foundations.
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Cheaper oil and less relative debt should boost consumption.
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But being able to avoid a second recession would not put an end to the country's problems. Indebtedness continuing to approach normal levels and improvements in the labour market will not come about thanks to growth in two quarters but to the average progress made over the next few years which, after the revision, is less than expected. The latest figures show that real GDP in June 2011 was still below its level reached in September 2007. Similarly, the purchasing power of an average household has amassed a decade of stagnation and reversals of the like not seen since before the Second World War.
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The lower growth forecast for the next few years means unemployment and the surplus of housing for sale will continue.
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Continuing with longer lasting ills, the labour market is the key indicator for the fortunes of the middle class. Of the 8.75 million jobs lost between February 2008 and February 2010, only 1.8 million have been recovered. The lower growth expected for 2011 and 2012 means that the unemployment rate is unlikely to fall from July's rate of 9.1% until well into 2013. Similarly, the large number of discouraged workers, or those working part-time involuntarily, will absorb a significant proportion of any jobs that might be created in the next two years.
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The CPI rises by 3.6% while core inflation is up 1.6% due to the price of rent.
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Continuing weakness in the labour market is perpetuating the excess supply of housing. The excessive number of vacant properties might continue for two to five years as high unemployment is slowing up the creation of new homes, which are absorbing the excess of vacant properties, as well as leading to more mortgage foreclosures, swelling the excess supply. One positive point, however, is that housing prices seem to have touched bottom. After almost a year of consecutive falls, albeit at a declining rate, the Case-Shiller index of second-hand housing for May maintained the prices for April, which were revised upwards.
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Prices continued to surprise by rising somewhat more than expected, with a general consumer price index (CPI) that rose in July to 3.6% year-on-year and an underlying CPI, which excludes energy and food prices, that rose by 1.6%, pushed up by house rents due to the greater demand for family homes, predominantly rented properties, as a result of the crisis. However, the weak economy and lower oil prices should make price rises ease in the second half of the year.
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