Research Dept. News
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Monthly Report, num 357 - May 2012
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International review - United States
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The United States: a recovery that has yet to become vigorous
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The standstill in income augurs moderation in the expansion.
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The US economy is enjoying a notably better start to 2012 than had been expected two months ago. At the time of writing this report, the Department of Trade announced that growth in gross domestic product (GDP) for the first quarter of 2012 was 0.5% quarter-on-quarter and 2.1% year-on-year, remaining as strong as it was at the end of 2011. However, although the recovery is solid, it is more modest than these figures might suggest. The private sector has yet to take over from expansionary policies, and growth for the whole of 2012 should not go much beyond 2.0%, while the euro area crisis and oil prices are still factors of uncertainty.
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The reason for this moderate growth can be found in the components that have contributed most to the latest advances: the increase in stock and private consumption. While inventories are variable by nature, the rise in private consumption, a component that accounts for 71.0% of the whole economy, should lose steam and gradually return to growth in the range of 1.5-2.0%.
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This is because the purchasing power of households' disposable income has been at a standstill since January 2011, falling by 0.2% year-on-year in February. The recovery of the labour market in 2012 is also unlikely to lead to any rise in wages that could alleviate this situation and, without an increase in income, the growth in private consumption is not sustainable. Consumption is therefore remaining firm thanks to a lower savings rate that, in February, stood at 3.7% of disposable income, the lowest since August 2009, a rate which should rise over the coming months, obeying the need to reduce household debt. Consumption should therefore fall back towards more moderate growth that would nonetheless be supported by improvements in assets, either via rising stock market values or due to the relatively favourable evolution of the deleveraging process, with household debt that ended 2011 at 112.7% of disposable income, a drop of 17.3 percentage points with regard to the peak in 2009.
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The upswing in consumption is partly due to temporary factors.
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The latest consumer spending indicators also point towards this pattern of vigorous growth with a tendency to moderate. Retail sales, without cars or petrol, rose by 5.7% year-on-year, with a first quarter posting a rise of 1.2% quarter-on-quarter in real terms, in line with the robust performance by the national accounts. However, a significant part of this improvement was due to a particularly benign winter, which may be offset slightly over the coming months. The Conference Board Consumer Confidence index is also pointing in the same direction, falling slightly in March to the level of 70.2 points, calling a halt in its rise when it is still clearly below its historical average.
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Within a more upward context, business sentiment is in line with higher growth, in the order of 3% and, in 2012, production capital investment should remain as strong as last year, although the trend in March was uneven. The activity index of the Institute for Supply Management (ISM) for manufacturers provided the positive note, rising to 53.4 points. However, the services index, which accounts for 86.2% of jobs and two thirds of private consumption, was more negative with a drop from 57.3 to 56.0 points.
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Entrepreneurs are still more optimistic than consumers.
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The labour market provides a reliable image of the state of the recovery. There are improvements but these are slow and not enough. Job creation continues to advance, with the addition of 120,000 net jobs in March, a relatively modest figure that may have been affected by the excessive rises seen in January and February. The unemployment rate fell again in March, standing at 8.2%, one tenth of a percentage point below the figure for February. A large part of this decrease is due to a reduction in the labour force as the number of discouraged workers increases. Nevertheless, the improvement in the labour market is real, as the number of underemployed people, those working part-time involuntarily, fell from 9.1 to 7.6 million between September 2011 and March 2012 and the hours worked per week are close to their historical average.
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Unemployment falls to 8.2% but improvements in the labour market are too slow.
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The problem is that this improvement is slow. In two years, the United States has recovered 40.7% of the jobs lost during the crisis so that, should this current rate continue, three years would be needed for the counter to get back to zero. This slowness has two undesirable consequences. Firstly, it delays the recovery in wages, which usually arrives after contracts and hours worked have increased. Without a recovery in wages, incomes cannot rise and culminate in the private sector taking over from public stimuli. Secondly, a context-related problem of poor demand runs the risk of becoming structural, given the high proportion of long-term unemployed, which are the most difficult to relocate.
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The CPI rises by 2.7% and core inflation by 2.3% but the trend in 2012 is still one of moderation.
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Given this situation, the Federal Reserve has remained cautious. The main scenario is that the current monetary policy will be kept up, with minimal interest rates. But we mustn't rule out the possibility of further quantitative expansions should the labour market show signs of weakening. On the plus side, inflation is still moderate and, at the current levels, allows the Fed room to manoeuvre. March's consumer price index (CPI) rose by 2.7% year-on-year (2.9% in February) and, if oil prices remain at their current level, it should continue to moderate, coming close to 2.2% by the end of year. For its part, the core CPI, which excludes energy and food prices, rose by 2.3% year-on-year (2.2% in February), momentarily delaying the expected moderation in prices.
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House prices continue to nearly touch bottom but there won't be a recovery until the end of 2013.
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The recovery in the housing market is also taking its time, affected by the persistent surplus supply, which could continue until well into 2013. Prices are still falling, albeit less and less. In January, the Case-Shiller index for second-hand housing had accumulated a drop of 7.5% compared with June 2010, when it started its downward slide again. With regard to activity, reasonable prices compared with the average household income and mortgage foreclosures due to default are leading to spikes in prices that are nonetheless irregular. Construction is more indicative of a general trend and fell slightly in March, with 654,000 new homes started, in annual terms, perpetuating a level that is very far from the average of 1.5 million during the period of 1995-2000, prior to the bubble. The fact is that 12 million households whose mortgage debt is higher than the value of their home are a heavy burden. Given the insufficiency of the government scheme to modify mortgages, which attempted to extend repayment periods and reduce or delay interest payments, the Federal Housing Finance Board plans to extend this with effective reductions in the mortgage debt still outstanding for these homes. A change that is supported by the IMF, in its World Economic Outlook in April.
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The trade deficit falls temporarily due to the drop in Chinese imports.
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No significant contributions to growth are expected from the foreign sector, given the situation of global demand. However, the trade balance for goods and services in February noticeably improved, falling to 46.03 billion dollars, a drop of 6.5 billion that can be explained almost entirely by the reduction in imports from China, which might be due to stoppages for the Chinese New Year. For their part, exports remained the same as in January, evidence of the little room for improvement in the current situation. Nevertheless, oil prices still pose a threat, no longer for the foreign sector but for the economy as a whole, due to the effect they might have on households' disposable income. What has changed in March is the fact that the risk is now symmetrical, as we cannot rule out Saudi Arabia's increased production pushing down oil prices, which would boost growth in the United States.
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