2012-01-16 US update[1]

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International > Economics 16 January 2012

US Monthly Update

National Australia Bank Group Economics | 1

Economic indicators in the U.S. continue to be

generally positive. Both the ISM surveys posted

modest gains in December, employment continues to

grow, as does consumption although the pace is

decelerating. Business investment also appears to be

slowing down, as are exports, but inventories will

make a positive contribution to growth in the

December quarter.

Overall, partial indicators point to a further pick-up in

the pace of GDP growth in the December quarter toaround 3.0% ( annualised rate), which will result in

annual growth of 1.7% in 2011 (revised down from

1.8%). In 2012 we expect GDP will grow by 2.4% and in

2013 by 3.1%.

Against a backdrop of an improving economy

monetary policy has been on hold in recent months.

However, there are several factors which possibly on

their own, and especially if they were to come

together at the same time, could trigger a further

round of quantitative easing. Changes to the Feds

communication strategy may also be used to

implement a de facto policy easing.

Overview

Economic indicators in the U.S. continue to be generally positive,

notwithstanding a further downward revision to estimated

September quarter 2011 GDP growth (from 2.0% to 1.8%

(annualised rate)). Both the ISM surveys posted modest gains in

December, employment continues to grow, as does consumption

although the pace is decelerating. Business investment also

appears to be slowing down, and the November trade data shows

that exports have started to soften as well. Inventories will make a

positive contribution to growth in the December quarter.

In line with this, the Feds Beige Book, which brings together

information received from its business contacts, reported that

national economic activity expanded at a modest to moderatepace during the reporting period of late November through the

end of DecemberCompared with prior summaries, the reports

on balance suggest ongoing improvement in economic conditions

in recent months.

Overall, partial indicators point to a further pick-up in the pace of

GDP growth in the December quarter. We have revised up our

forecast of December quarter GDP growth to 3.0% (annualised

rate), which would result in annual growth of 1.7% in 2011

(revised down from 1.8% due to the revisions to the September

quarter). However, with considerable headwinds still facing the

economy weak household balance sheets and income growth, a

troubled housing sector, fiscal consolidation and a slowing global

economy and the bounce back from the fading of Japanesesupply disruptions coming to an end, growth is expected to

moderate early in 2012. For 2012 as a whole we expect GDP will

grow by 2.4% and in 2013 by 3.1%.

Consumption

December retail sales and other data showed a further

moderation in consumption growth in December. Nominal retail

sales grew by only 0.1%, the smallest monthly increase since

May 2011. With retail gasoline prices still falling into December it

is possible that, as in the previous two months, the real rate of

growth will be higher than the nominal rate.

The earlier strong growth in part reflected a rebound in motor

vehicle sales after consumers delayed purchases earlier in the

year following major supply disruptions. As a result, by November

auto sales had risen to levels not seen since mid-2008 (excluding

the one-off impact from the end of the clash for clunkers program

in August 2009). This bounce back appears to be over, with light

vehicle sales declining slightly in December (-0.5%).

Moreover, the earlier strength in consumption came at the

expense of households running down their savings rate as

income growth slowed down, and was therefore unlikely to be

sustained.

Consumption indicators continuing to moderate

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

Feb-11 May-11 Aug-11 Nov 11 Feb-11 May-11 Aug-11 Nov-11

Retail sales

Real

Consumption indicators (a)

million (s.a.a.r.)mom%

(a) The only data series available for December is nominal retail sales

Real personal consumption expenditure

Nominal

Sources: Bureau of Economic Analysis, Census Bureau, Autodata

Personal income in the September quarter was affected by a

slowdown in wage income growth as well as a decline in interest

income as interest rates fell. Indicators suggest that income

growth will come in more strongly in the December quarter. This

is despite only weak income growth in November (0.1%), as

October grew strongly (0.4%) and growth in employment, average

weekly hours and earnings point to reasonable growth in

December.

Consumer credit, which had slowed recently, grew strongly in

November, recording the fastest monthly gain in consumer credit

in around ten years. Both revolving (mainly credit cards) and non-

revolving (such as student and auto loans) recovered from a

September quarter slowdown. Senior loan officers also continueto report an easing in loan standards for consumer loans.

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16 January 2012

16 January 2012 National Australia Bank Group Economics | 2

Rebound in consumer credit

Consumer credit (3mth m.a.)

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Nov-01 Nov-03 Nov-05 Nov-07 Nov-09 Nov-11

mom%

Non-revolving

Revolving

Total

Source: Federal Reserve

In the last update we noted that household wealth declined in the

June and September quarters. It is worth noting that despite thelarge day to day swings, American share prices have recovered

much of the losses that occurred mid-year. Between September

and December the S&P 500 share index rose 6% and it is on

track to record a further increase in January. With house prices

still falling (or flat at best, depending on the measure used) any

gains in household wealth will still likely be small, but it does

represent an improvement from earlier in the year.

Improved personal income growth coupled with moderating

inflation (discussed below), the support for household wealth from

rising equity prices, and improving credit conditions will provide a

floor under consumer spending in the months ahead. However,

with the bounce back in auto sales from the Japanese supply

disruptions over, and the likelihood of consumers reversing recentreductions in the savings rate, we are expecting only modest

consumption growth in coming quarters.

Housing construction

We also mentioned in last months update that, despite the many

problems in the housing market, that there were signs that

housing construction activity might be starting to grow again

rather than just bounce along the bottom. This prospect was given

added life by a further 5.7% rise in building permits in November

2011 (which followed a 9.3% increase in October). As in October,

the fastest growing component was multi-family (e.g. apartment)

construction reflecting the increased demand (and relatively low

vacancy rates) for rental properties. Increasing building permits

are being reflected in actual activity, with nominal residential

construction expenditure in November 2011 recording its fourth

consecutive month of growth.

Other parts of the housing market are also showing some

improvement. For example, existing home sales have risen in

three of the last four months and the NAHB Housing Market index

again rose in December. However, indicators point to house

prices remaining flat (the Federal Housing Finance Authority

purchase only index) or declining (S&P/Case Shiller 20 City

composite). Together with an overhang of vacant properties,

further price falls will constrain any rebound in construction as it

makes the option of a new build less competitive against the

alternative of buying a new house.

Housing still very weak but some signs of life

US Building permits

0

500

1000

1500

2000

2500

Jan-02 Jan-04 Jan-06 Jan-08 Jan-10

'000

500

550

600

650

700

No v- 09 N ov -1 0 N ov -1 1

Source: Census Bureau

Investment

Business investment continues to show signs of slowing.

Business surveys taken following the confidence sapping eventsearlier in the year (the debt limit debate, recession fears and

downgrade of the U.S.s credit rating by Standard & Poors)

showed a noticeable decline in capex intentions which is

increasingly showing up to show up in harder measures of data.

While the headline measures have been boosted by strength in

the aircraft sector, core (non-defence excluding aircraft) capital

goods shipments have declined in each of the last three months

(to November) and core orders in the last two months. For the

three months to November, both measures are still higher than

the previous three month period, but the trend is clearly

downwards.

Equipment investment slowing but surveys have rebounded

Non-property investment indicators

-6

-4

-2

0

2

4

Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11

-60

-40

-20

0

20

403mth m.a. % index

Core capital goods orders (lhs)

Core capital goods

shipments ( lhs)Regional Fed surveys -

6mth capex intentions

(rhs)

Part of the recent weakness is likely due to supply disruptions

from the Thailand floods. Despite strength in motor vehicle sales,

both orders and shipments of motor vehicles declined in

November. This impact will be temporary and there will be a boost

to growth when it is reversed. Moreover, the business survey

measures have started to trend back upwards suggesting that any

slowdown may be short-lived, particularly given the underlying

support for business investment from high, and still rising,

corporate profits.

Private investment in non-residential structures, which started

growing again in the June and September quarters, is also

slowing. Construction expenditure was flat in November.Moreover, the growth previously recorded for October (of 1.3%

mom) was revised away and now the Census Bureau estimates

there was a 0.6% decline in that month.

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Business inventories (nominal) rose at a more moderate rate in

November (0.3% mom) following a large rise in October (0.8%

mom). With nominal inventory growth in the first two months of

the December quarter already higher than in the September

quarter, inventories are set to contribute to fourth quarter GDP

(after a detraction in the previous quarter).

TradeThe first clear sign that the slowdown in world growth is affecting

US exports appeared in Novembers trade data as real goods

exports declined by 1.5% mom. Nominal exports to the Euro

zone in November were 3.3% higher than a year ago, markedly

down from 7.3% yoy in October. The ISM survey had been

pointing to this so the slowdown in November was not a surprise.

The ISM manufacturing survey export index rose slightly in

December (as it did in October) and, with a reading of 53, is still

consistent with modest export growth. However, the non-

manufacturing survey indicator fell in the same month to 51,

remaining just in expansionary territory.

Export growth slowing down

Export indicators *

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10

15

20

25

30

35

40

45

50

55

60

65

goods exports (lhs)

ISM

manufacturing

survey (rhs)

mom% index

* both series are 3mth mo ving averages

Source: Census Bureau, ISM

At the same time, real goods imports rose strongly in November

(1.2% mom), after a small decline in October. The ISM import

indices (both manufacturing and non-manufacturing) picked up

strongly in December (from less than 50 in November to 54)

suggesting that the recent weakness in imports may be over.

Industrial production

Following strong growth in October (0.7% mom) industrial

production took a step back in November, declining by 0.2%.

Mining and utilities both recorded modest growth (0.1 and 0.2%

mom respectively) while manufacturing IP fell by 0.4% mom. Part

of the fall in manufacturing IP was likely due to some supply chain

disruptions from the flooding in Thailand, reflected in a fall in

motor vehicle assemblies in November of 5.4% mom. However,

there was broader weakness as excluding motor vehicles,

manufacturing IP still fell 0.2% mom.

Decline in November IP but indicators point to a better December

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Jan- 10 Jul- 10 Jan- 11 Jul- 11 Jan- 10 Jul- 10 Jan- 11 Jul- 11

35

40

45

50

55

60

65

Manufacturing indicators

Manufacturing PMI

ISMManufacturing prodn

mom % Net balance

mom%

3mth

m.a.

Source: Federal Reserve

While Novembers industrial production report might be evidence

that the United States will not be immune from the global

slowdown underway, its significance should not be overstated.

The Thailand related supply disruptions are not expected to be as

severe as those from Japan earlier in the year. Moreover, othermanufacturing indicators were more positive in December. The

ISM manufacturing PMI picked up in December to 53.9 (its

highest level since June 2011). Moreover, manufacturing

employment, which was flat in November rose by 0.2% in

December the strongest growth since July. Similarly, average

weekly hours worked by manufacturing employees in December

rose, recovering some of the November fall.

Labour market

Non-farm employment ended 2011 on a positive note with an

increase of 200,000 jobs. This is only the fifth time the 200,000

barrier has been reached in over four years (excluding Census

workers). The unemployment rate also declined to 8.5%, from arevised 8.7% in the previous month. Similarly, initial jobless

claims have been on a downwards trend, although in the first

week in January there was a jump in claims, moving the 4 week

moving average slightly higher.

Further labour market gains in December

non-farm em ployme nt & jobless claims*

-900

-700

-500

-300

-100

100

300

500

700

Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11

100

200

300

400

500

600

700

800

900

monthly change

non-farm empl

(lhs)

Jobless c laims

(inverted rhs)

'000s

* Jan 12 observation current 4w k m.a.

Source: Bureau of Labor Studies, Department of Labor

While there were increases in non-farm employment across most

broad sector categories (excluding public sector jobs which again

fell), unusually strong gains in a couple of sectors suggest that the

December report may be overstating jobs growth. The

transportation and warehousing sector added 50,000 jobs alone

which may reflect problems with seasonal factors a similar

increase last year was almost all given back the following month.

The private construction sector added 17,000 jobs (after being

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16 January 2012


flat, on average, over the last six months) and may partly reflect

benign weather conditions.

Inflation

As we noted last month, consumer inflation has moderated in

recent months. This is true both for the headline and core

measures. This month we take a closer look at inflation and

inflation expectations see the Spotlight on Inflation section atthe end.

Inflationary pressures moderating

Price indicators

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

0.6

Mar-10 Sep-10 Mar-11 Sep-11

mom%

Core

PCE

Headline PCE

Sources: Bureau of Economic Analysis

Policy

With readings of the economy showing improvement, including in

the labour market, not surprisingly the last two meetings of the

Feds FOMC have left monetary policy unchanged. This followed

some small stimulatory actions in the August and September

meetings1.

However, there are several factors which possibly on their own,

and especially if they were to come together at the same time,

could trigger a further round of quantitative easing. Changes to

the Feds communication strategy may also be used to implement

a de facto policy easing.

The recent moderation in inflation has increased the likelihood of

inflation staying below the Feds unofficial inflation target of 2%.

This means that the Fed will have the capacity to ease policy,

without putting at risk its inflation mandate, to address the sti ll

high unemployment rate (the other side of its dual mandate).

Economies (and their associated statistics) rarely move forward in

a smooth manner. With a slowing in the pace of growth in the

March quarter widely expected, it is possible that there will be a

run of unexpectedly poor data (negative surprises) which may

raise concerns about the direction of the economy. This could be

accentuated by any worsening in the European sovereign crisis

and/or by a greater than expected fiscal contraction (e.g. due to

failure by congress to extend the temporary payroll tax cuts and

extended unemployment benefits beyond February).

It is highly likely that a combination of below target inflation, a run

of poor data and bad exogenous news (fiscal policy or overseas

developments) would trigger further monetary action. This is

particularly the case in 2012 as, due to the annual rotation of

members, the FOMC is more dovish this year.

1Namely the change to forward guidance to state that economic

conditions are likely to warrant an exceptionally low fed funds rateuntil at least mid-2013 (August meeting) and the maturity extensionprogram and decision to reinvest agency principal payments intoagency MBS (September meeting).

It is clear from the FOMC minutes that several members want to

loosen policy further although its timing may be affected by

possible changes in the Feds communication strategy. The

December meeting minutes included the following statement: A

number of members indicated that current and prospective

economic conditions could well warrant additional policy

accommodation, but they believed that any additional actions

would be more effective if accompanied by enhancedcommunication about the Committees longer run economic goals

and policy framework. When this will occur is not entirely clear

while a revised communication strategy will be taken to the

FOMCs January meeting, changes to the Summary of Economic

Projections (SEP) are to be considered by a subcommittee over

coming months.

One change in the communication strategy has already been

agreed. From January, FOMC members expectations about their

projections of appropriate monetary policy will be included in the

Summary of Economic Projections (or SEP which is released four

times a year). It is possible that this might suggest a longer

period, than currently expected, for the Fed Funds Rate to remain

at its currently 0-25bp target level, which may therefore act as an

effective monetary easing (similar to the impact of the Augustannouncement).

On the fiscal side, policy continues to be dominated by a high

degree of uncertainty reflected, in a last minute deal for a two

month extension to the temporary payroll tax cuts and extended

unemployment benefits to February while legislators try to sort out

a full year extension. Even with a full year extension (which is the

most likely outcome), fiscal policy will be contractionary in 2012.

Meanwhile, at the state/local government level, employment

continues to fall although at a more moderate rate in recent

months.

[email protected]

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Spotlight on Inflation The moderation in inflation experienced in recent months

continued in November. Both the headline CPI and personal

consumption expenditure (PCE) deflator recorded small

declines in November, as in October. Core inflation (which

excludes energy and food prices) has also moderated inrecent months. After growing at an annualised rate of 2.2% in

the three months to August 2011, over the three months to

November the core PCE deflator grew by only 0.6%

(annualised rate). Core CPI has shown a similar broad trend

but continues to track higher than the PCE measure.

The declines in headline consumer prices are being driven

by declines in energy prices plus a slowdown in inflation

across a range of other goods and services, including food.

Even clothing and footwear has moderated from its rapid

growth earlier in the year (and this trend should continue as

cotton prices come down). Motor vehicle and parts prices

have also been falling as the price rises that followed the

supply disruptions arising from the Japanese

earthquake/tsunami earlier in the year unwind.

Producer prices are also coming down, signalling less

upstream price pressure. While over the year growth in the

finished goods producer price index is still currently elevated

at around 6% - and the core measure at 2.9% yoy (its

highest rate in almost 2 years), recent monthly growth rates

are tracking lower than this. With the producer price indices

for both intermediate materials & supplies and crude

materials declining since mid-2011, the downwards pressure

on finished goods prices is set to continue.

This is consistent with declines in commodity prices in recent

months, driven by concerns over the global economy.

However, there has been upwards pressure on oil prices

recently due to Iran/US tensions and it is unclear how this will

play out.

Downwards pressure on prices is also coming from the 6%

appreciation in the $US between July and December

(measured by the Feds broad dollar index), which more than

reversed the depreciation in the first half of the year.

Reflecting these pressures we expect that annual consumer

price inflation has peaked. Core PCE inflation is set to

decline through much of 2012 to around 1% yoy before

picking up towards the end of the year and into 2013, but

remaining below 2%. While the economy is expected to

grow, this will not exert much price pressure as the pace will

not be significantly different to trend in 2012 and only a little

bit stronger in 2013, suggesting that their will continue to be

a significant output gap.

Overall, inflation expectations continue to remain well

anchored. Consumers short-term inflation expectations

moderated considerably in the second half of the year as

energy prices declined. The Thomson Reuters/University of

Michigan 1 year ahead median measure fell from 4.6% in

April to 3.1% in December, returning them to a more typical

level. Professional forecasters short-term expectations

(measured by the Philadelphia Feds survey) are more stable

and remain on the low side of the historical range. Medium-

term expectations of consumers and forecasters lie within the

typical historical range, although expectations implied from

bond markets are slightly below historical experience pre-GFC.

Consumer inflation moderating

Consumer prices: PCE

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11

yoy %

Core PCE

PCE

Supported by declining commodity prices

Commodity price indicators

350

400

450

500

550

600

Nov-09 May-10 Nov-10 May-11 Nov-11

2.00

2.50

3.00

3.50

4.00

4.50$US per gallon (n.s.a.)Index

CRB commodity price

index (LHS)

U.S. retail gasoline prices

(RHS)

...and recent appreciation of the $US

Import prices & the exchange rate

-20

-15

-10

-5

0

5

10

15

20

25

2002 2004 2006 2008 2010

yoy%

Broad dollar index

Import prices excl petroleum

Inflation expectations remain well anchored

5-year inflation expectations

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2005 2007 2009 2011

%

Professional

forecasters

Consumers

Tsy bond market

Sources: BEA, Energy Information Agency, Commodity Research Bureau,Federal Reserve, BLS, Thomson Reuters/University of Michigan, PhiladelphiaFederal Reserve

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Important Notices

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Documents

2012-01-16 US update[1]