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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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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 National Australia Bank Group Economics | 4
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.
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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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Global Markets Research
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Head of Research, Australia
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Important Notices
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