Research Dept. News
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Monthly Report, num 350 - October 2011
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International review - United States
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The United States: the road to recovery is long and narrow
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The United States has insufficient growth.
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The United States' economy is weak. The private sector is still failing to take over from the expansionary measures that avoided a depression and took growth for the whole of 2010 to 3.0%. The quarter-on-quarter growth in gross domestic product (GDP) for the first two quarters of 2011 was 0.1% and 0.3%, respectively. This tone is expected to improve for the second half of the year thanks to the relaxation of temporary factors that hampered growth, such as oil prices. Nonetheless, growth for the whole of 2011 is unlikely to exceed 1.6%.
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Unemployment, indebtedness and the housing market hamper the recovery.
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Although the latest indicators do not point to a double dip recession, the risk is still that growth will be lower than expected and the underlying problems have not altered. Persistently high unemployment and continual losses in the housing sector are hitting the middle class particularly hard as, in debt, it is seeing the purchasing power of its income and wealth diminish. The purchasing power of the average household income is 7.1% below the level of 1999 and housing prices have yet to pick up. For its part, the gross indebtedness of households stood at 114.3% of disposable income in the second quarter, now far from the peak reached of 130.2% in September 2007 but still above the normal level. These factors mean that growth will remain weak throughout 2012, so we predict a growth rate of 2.0%.
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Private consumption should pick up slightly in the third quarter.
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The hardships of Joe public are reflected in consumption, namely the expectations for public and the weakness of private consumption, whose growth in the third quarter should nonetheless pick up a little. This improved tone is due to July's increase, although this improvement is unlikely to increase further, as the reaction was centred mostly on consumer durables while the consumption of services and non-durable goods, which are more indicative of the underlying trend, is still stagnant. Retail sales in August also showed a clear slowdown compared with the good month of July, with automobiles losing a large part of what they had gained.
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In the case of surveys, in August the Conference Board consumer confidence index fell drastically. This drop is partly due to the uncertainty caused by negotiations to raise the legal debt ceiling in order to avoid default but the downward trend in future expectations is getting worse, in August coming close to the record lows of early 2009. Entrepreneurs, who started 2011 optimistically, have also gradually darkened their perceptions, with a business sentiment index from the Institute for Supply Management in August that is consistent with the current low rates of growth.
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Little leeway for expansionary policies.
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The problem for the coming years is that the leeway for expansionary measures has narrowed. With regard to monetary policy, interest rates are already at minimum levels and the Fed must opt for exceptional measures such as the purchase of public debt or, as announced this September, extending the maturities of its assets, selling 400 billion dollars in bonds with maturities of up to three years and buying other longer term bonds: measures whose effect on growth is limited.
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A fiscal consolidation plan combined with short-term stimuli is required.
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But the greatest challenges lie in the area of fiscal policy. The authorities' priority must be to design a credible agenda for fiscal consolidation. A task that the United States, with a gross public debt that will reach 100% of GDP in 2011, has been slow to undertake compared with other advanced economies. A context that, should the debt's sustainability be assured, would allow the authorities to implement temporary stimuli to support the recovery more decisively. One example of the prevailing disagreement in this respect is the lack of agreement regarding President Obama's plan to boost employment. This plan proposes an injection of 447 billion dollars through reductions on income tax and on small firms, which would be offset by higher taxes on high income brackets. The plan's net effect would stimulate GDP by 1.5% in 2012, but is unlikely to be passed in its entirety.
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Looking in detail at the labour market, August's unemployment rate remained at 9.1%, but is likely to come close to 9.5% in 2012, given the weak growth forecast. Similarly, the big pool of discouraged workers and those working part-time involuntarily will absorb a large number of the jobs that may be created. Recovery in the labour market is key to the fortunes of the middle class improving. A rise in nominal income would help to improve households' gross debt-disposable income ratio and boost consumption. Employment has an effect on income via two mechanisms: wages and the activity rate.
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The recovery in wages slows up and the rate of activity is below its secular trend.
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But the recovery's loss of steam is also being felt by wages. The average weekly wage rose by 1.7% year-on-year in August, a rate that entails a loss of purchasing power and reveals a clear slowdown since the 3.7% of August 2010, when the economy was growing faster than now. With regard to the activity rate, the ratio between the employed workforce and the population, an exceptionally high number of jobs were lost during the crisis and the recovery is exceptionally weak, with zero net job creation in August. Consequently, the activity rate is still falling, standing at 44.6% in July, the lowest since 1984, far from the 48.2% of December 2007 and even further from the long-term trend.
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Persistently weak employment and income are prolonging the surplus supply of housing, which might continue beyond the end of 2013. In this respect, housing prices have yet to bottom out, with the Case-Shiller index of second-hand housing for the 20 most significant areas in June falling again, albeit by a minimal amount of 0.1%. Supply still shows no signs of life, with the number of new homes started remaining stagnant at less than 600,000 in annual terms, a third of the normal figure, while second-hand house sales seem to be gradually getting back to normal, in August exceeding 5 million in annual terms.
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The CPI rises to 3.8% and core inflation to 2.0% but this should ease off in the fourth quarter of 2011.
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Inflation continued to surprise by rising but the outlook for 2012 does not include a scenario of inflationary pressures so the Federal Reserve still has some room to manoeuvre. The general consumer price index (CPI) increased in August by 3.8% year-on-year, 3.6% in July, but more significant was the rise in the core CPI, which excludes energy and food prices, up by 2.0% compared with the previous month's figure of 1.8%. The core CPI continues to rise from its record low of 0.6% in October 2010, pushed up by the end of discounts in sectors such as automobiles, by higher oil prices being partly passed on to consumer prices and especially by the increase in house rents. Apart from the latter, which is due to the greater demand for rental family homes because of the crisis, the other components should start to ease in the last quarter of the year, given the low level of production capacity utilization.
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The foreign sector might contribute positively to growth in the third quarter.
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The foreign sector might also provide economic activity with some breathing space. July's trade balance of 44,808 million dollars was 13.1% lower than the figure for the previous month. The improvement was mostly due to the upswing in export volumes after a bad June, which suggests a greater positive contribution to GDP growth.
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