Research Dept. News
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Monthly Report, num 358 - June 2012
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International review - United States
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The United States: more consumption than income
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The United States maintains its tone of recovery and grows by 2.1%.
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The expansion is consolidating and the downward risks are abating. The Falling oil prices, possible expansionary effects due to the electoral year and the strength of consumption are offsetting the negative consequences that might result from the lack of a credible route map for fiscal consolidation and a potential deterioration in the euro area debt crisis.
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Growth is supported by private consumption and stocks but capital goods investment falls.
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Gross domestic product (GDP) of the first quarter grew by an expected 0.5% quarter-on-quarter and 2.1% year-on-year. Consequently, a large part of the upswing from the end of last year has remained in place and everything points to an advance slightly over 2.0% for the whole of 2012, more than predicted two months ago. However, the composition of GDP did cause some surprise and underlined the modest nature of the recovery. Growth was mostly based on a private consumption that increased by 0.7% and exceeded even optimists' expectations. The second contribution in terms of importance for growth came from the accumulation of inventories, which was also higher than expected. The other side of the coin was provided by capital goods investment, which unexpectedly fell. Although this component should pick up in the second quarter, the end of the upward cycle for inventories and the slowdown in private consumption point to a relatively flat growth trend throughout 2012.
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Private consumption exceeds income and savings return to minimum levels.
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Private consumption should lose steam in the second quarter because debt and wage rises, which are its main sources, are limited. The boost for the first quarter came from a fall in the savings rate, which fell to 3.9% of disposable income, the lowest for the last four years. Household debt has fallen by 17.3 percentage points in terms of disposable income since September 2007 but, nonetheless, the 112.7% of disposable income of December 2011 seems too high, so the savings rate should rise again above 4.0% of disposable income, with the consequent effect of slowing down consumption.
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The latest figures for retail trade suggest this is already happening. Excluding the fluctuating figures for cars and petrol, in the first three months of 2012 the average month-on-month growth in retail sales was 0.8%, while in April this hardly reached 0.1%. The slowdown throughout 2012 should be more gradual, however, as part of April's deceleration was due to strong consumption in the first quarter, boosted by an abnormally mild winter. The recovery in the consumer confidence index of April's Conference Board followed a similar pattern, counting two consecutive months of stagnation at a level that is clearly below the historical average.
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The recovery in the labour market progresses but wage rises will take some time to arrive.
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If the debt option is complicated for consumers, it's the same situation with income. Household disposable income in real terms is practically at a standstill, with a minimal increase of 0.1% year-on-year in March. Households get 64.2% of their income from employment but the trend in the labour market does not indicate much liveliness in wages, in other words household income. In a typical expansion, an increase in employment and the hours worked precedes wage rises but the former is happening slowly and the latter will take its time to arrive. 688,000 net jobs were created in the first quarter of the year, a monthly average of 229,000. The 115,000 jobs created in April supposed a return to normality that, as with retail sales, is excessively abrupt in compensation for the strength of the previous months. The cruising speed of job creation should be around halfway, about 175,000 jobs per month, so that a little more than two years would be required to reach the levels of December 2007. The weekly hours worked remained close to the historical average but the fall in under-employment, which includes workers working part-time involuntarily, was interrupted momentarily in April.
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Investment must recover in the second quarter.
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The most positive indicator for the labour market is still the unemployment rate, down one tenth of a percentage point to 8.1%, nine tenths of a percentage point below the level of the same period a year ago. However, two thirds of this improvement can be attributed to a drop in the activity rate and only one third to job creation. Most of the forecasts see the unemployment rate remaining unchanged until well into 2013.
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Whereas consumption is likely to slow down, the business activity indices of the Institute for Supply Management (ISM) point to capital goods investment rectifying its decline in the first quarter. April's manufacturing ISM index rose to 54.8 points, consistent with robust economic growth. This recovery is also suggested by the services ISM as, although it fell, its level of 53.5 points is suggestive of modest growth but not declines.
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The CPI stands at 2.3% but lower oil prices will push it down.
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Similarly, construction activity over the last few months is looking stronger than expected. The 4.5% quarter-on-quarter growth should continue, given the 717,000 new homes started in April, in annual terms, supposing a year-on-year increase of 29.9%. However, the exceptionally low starting levels mean that its contribution to growth is low and underlines the fact that the sector has yet to see the light at the end of the tunnel. Oversupply will continue until 2013, although prices might have bottomed out. The Case-Shiller index for second-hand housing in February for the twenty main cities put an end to its series of falls with a slight rise and business sentiment has improved to some extent. However, the sector's true stimulus comes from the Administration being able to achieve the restructuring of the debt of the 12 million homes with an outstanding mortgage worth more than the value of their property.
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Stability is the order of the day for prices. The consumer price index (CPI) rose by 2.3% year-on-year in April (2.9% in March) due to the base effects of oil prices. However, the core CPI, which excludes energy and food prices, seems reluctant to confirm its expected slowdown and repeated the 2.3% year- on-year rise of the previous month, supported by an upswing in the price of durables. The balance is being broken and pushed down by oil prices as, if their downward trend continues, the CPI should remain close to 2.0% by the end of 2012. In any case, prices leave room for monetary policy to continue supporting growth.
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The trade balance will benefit from cheaper oil in the second quarter.
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With regard to the foreign sector, March's trade deficit increased to 51.8 billion dollars, 6.4 billion more than in February, which had been abnormally low due to the Chinese New Year celebrations. Most of the increase is centred on the deterioration in its trade balance with the Asian giant. However, March offered two potentially positive notes. Firstly, exports picked up in spite of weak global demand and the relative strength of the dollar. Secondly, the trade imbalance in nominal terms should adjust over the coming months as the effects of falling crude prices, which accounts for 55.1% of the trade deficit, were not included in March's figures.
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