Research Dept. News
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Monthly Report, num 352 - December 2011
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International review - United States
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The United States: The vigour of autumn fails to clear the air
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The United States picks up in the second half of year, without improving expectations for 2012.
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The economy's recovery is consolidating. October's business indicators show the upswing continuing in the third quarter, where gross domestic product (GDP) grew by 0.5% quarter-on-quarter and by 1.5% year-on-year. This should take growth for 2011 as a whole to around 1.8%, a rate that is higher than what was expected in September. The reasons for this renewed vigour can be found in consumer behaviour, cheaper oil and industrial investment.
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The push from consumption is supported by lower savings.
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This improved tone of the US economy in the second half of the year averts the spectre of a double-dip recession and is particularly welcome in a situation where the global economy is feeble. Nevertheless, the United States is still having serious problems of insufficient growth, which means that a significant part of its production resources have been left idle, perpetuating the weakness in the labour and housing markets. This upswing, which seems temporary in nature, does not suppose any significant improvement for this problem. This is because the push from consumption is based on lower savings, because investment in industry will probably lose steam and, thirdly, because crude prices don't look like they will continue to fall with the same intensity. Similarly, the lack of political agreement regarding what the route map to fiscal consolidation should look like may result in fiscal policy being more of a burden than a stimulus in 2012. All this means that expectations have not improved for 2012, with growth that's unlikely to exceed 2.0%.
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Industry will moderate its upswing but still has a lot of room to improve.
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This consumer appetite could be felt in retail consumption which, excluding the volatile automobiles and petrol, continued to rise, growing by 6.0% year-on-year in October, meaning that, in real terms, it exceeded the pre-crisis levels of December 2007 by more than 2.0%. Automobile sales in the last three months up to October also intensified their growth while the University of Michigan consumer sentiment index for November left behind four months of lethargy.
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However, this push by consumption has been achieved thanks to a drop in the savings rate that, in terms of household disposable income, went from 5.3% in June to 3.6% in September, the lowest since December 2007, when the effects of the credit crisis had yet to be felt among consumers and indebtedness was not seen as a problem. Considering that household debt, after peaking at 130.2% of disposable income in September 2007, was still at a high 114.4% at the end of June, the savings rate is expected to rise over the coming months, with the consequent harmful effect on consumer spending. In addition, the good performance by automobile sales should tend to slacken in the next few months.
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Job creation is slow and the unemployment rate is 9.0%.
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The verdict is less clear regarding the continuity of investment in industry, another support for the upswing. In 2011, industrial investment has been benefiting from generous fiscal conditions, allowing investment to be repaid very quickly. The reduction of these advantages in 2012 will probably lead to a slowdown to some extent. Along these lines, the Institute of Supply Management (ISM) business sentiment indices for manufacturing and services point to a downward trend. In October, the ISM manufacturing index stood at 50.8 points, while the index for services was at 52.9, in both cases consistent with weak growth in the economy as a whole. Nevertheless, industrial investment might meet some resistance in 2012 as, in spite of the latest upswing, the recovery has a long way to go yet, as it is still 7.5% lower than the level at the start of the crisis, discounting price rises. The good figures for industrial production in October, up by 3.9% year-on-year, would reinforce this hypothesis.
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The labour market is the true sounding board for this crisis. The upswing in the third quarter could be felt in job creation, accumulating 469,000 new jobs in the July-October period. The problem here is the slowness of the recovery. Between March 2010 and October 2011, i.e. in 20 months of recovery, the US economy created 2.3 million jobs, a figure that is very far from the close to nine million lost between 2008 and 2009. The high proportion of long-term unemployed, reaching 42.5% of the total unemployed and double the peak in the previous crisis, is creating problems of adjustment, with job vacancies that are not being filled because the applicants do not have the necessary skills. The insufficient growth in aggregate demand might make the unemployment rate, which in October stood at 9.0%, pick up again slightly in 2012. A change in trend is unlikely as the contingent of discouraged workers or those working part-time involuntarily, who are not included in the official unemployment rate, will absorb a significant part of any new jobs created.
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The CPI, up 3.5%, with 2.1% for core inflation, should moderate in 2012.
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Unemployment and the slowdown in wages are reducing household income and playing an important part in increasing mortgage default, resulting in foreclosures on housing that, pending auction, are swelling the numbers of properties for sale. If employment doesn't improve, any aid that does not reduce the amount of mortgage debt will fall on stony ground as, after the grace period, people default again on their mortgage repayments. Both housing prices and construction activity are still at rock bottom and any recovery is unlikely before the second half of 2013. Because it's at rock bottom, residential investment no longer detracts from growth in the economy as a whole. But the well is deep and one gauge of this is the relative weight of residential investment in GDP, which in the third quarter was 2.4%, very far from the 5.2% for the period 1995-2000, prior to the bubble.
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With this panorama of low growth, the trend in inflation gives the Federal Reserve leeway to employ expansionary policies to boost employment and lessen the problems of bad mortgage debt, with a real possibility of a third round of quantitative easing in 2012. The moderation in oil prices, which seems to be taking its time in being passed on to consumer prices, meant that the consumer price index (CPI) slowed up its rise to 3.5% year-on-year in October. A moderation in inflation that is more evident in the core index, which excludes energy and food prices, up by 2.1% year-on-year supported by the price of rented housing, an item that, in October, contributed more than half the rise in total core inflation compared with September. The moderation in commodity prices and persistence of low production capacity utilization should keep inflation moderating throughout 2012.
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With regard to the foreign sector, the corrective trend in the trade imbalance has been confirmed thanks to a certain vigour in exports, coinciding with the moderation in oil prices and reducing the sum for imports. The trade balance deficit for goods and services in September was 43.1 billion dollars, the best figure for the last year, endorsed by the good performance of the deficit excluding oil and its derivates, which is a better reflection of the underlying trend. But this good development is unlikely to lead to significant contributions to GDP growth over the coming quarters, as the world's economic slowdown will reduce the demand for US exports, at the same time as oil's resistance to sharper price drops will prevent imports from falling.
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