International > Economics

16 January 2012

US Monthly Update

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 to around 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 Fed’s communication strategy may also be used to implement a de facto policy easing.

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
Consumption indicators (a) mom% 1.4 1.2 Retail sales Real personal consumption expenditure million (s.a.a.r.)

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 Fed’s ‘Beige Book’, which brings together information received from its business contacts, reported that ‘national economic activity expanded at a modest to moderate pace during the reporting period of late November through the end of December…Compared 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 Japanese supply 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%.

1.0 Nominal 0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 Feb-11 May-11 Aug-11 Nov 11 Feb-11 May-11 Aug-11 Nov-11
(a) The only data series available for December is nominal retail sales


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 nonrevolving (such as student and auto loans) recovered from a September quarter slowdown. Senior loan officers also continue to 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 Total Revolving Non-revolving mom%

Housing still very weak but some signs of life
'000 2500

US Building permits

700 650 600


550 500
Nov-09 Nov-10 Nov-11




0 Jan-02










Source: Census Bureau

Source: Federal Reserve

Business investment continues to show signs of slowing. Business surveys taken following the confidence sapping events earlier in the year (the debt limit debate, recession fears and downgrade of the U.S.’s credit rating by Standard & Poor’s) 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 investm ent indicators 4 3mth m.a. % Core capital goods orders (lhs) index 40

In the last update we noted that household wealth declined in the June and September quarters. It is worth noting that despite the large 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 recent reductions in the savings rate, we are expecting only modest consumption growth in coming quarters.

Housing construction
We also mentioned in last month’s 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.





-2 Regional Fed surveys 6mth capex intentions (rhs) Core capital goods shipments (lhs)




-6 Sep-05

-60 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11

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).

Decline in November IP but indicators point to a better December
Manufacturing indicators 1.2 1.0 0.8 0.6 3mth m.a. Manufacturing PMI 50 60 mom % Manufacturing prodn ISM Net balance 65


The first clear sign that the slowdown in world growth is affecting US exports appeared in November’s 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 nonmanufacturing survey indicator fell in the same month to 51, remaining just in expansionary territory. Export growth slowing down
Export indicators* 3 2 1 0 -1 -2 -3 -4 -5 -6 -7 Jan-00 Jan-02 Jan-04
go o ds expo rts (lhs) ISM manufacturing survey (rhs) mo m% index

0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 Jan-10

45 m om % 40

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

Source: Federal Reserve

65 60 55 50 45 40 35 30 25 20 15

While November’s 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, other manufacturing 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 a revised 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




* bo th 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.

non-farm em ploym ent & jobless claim s* 700 500 300 monthly change non-farm empl (lhs) '000s 100 200 300 400 500 600 Jobless claims (inverted rhs) 700 800 900 Oct-08 Oct-09 Oct-10 Oct-11

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.

100 -100 -300 -500 -700 -900 Oct-04 Oct-05 Oct-06 Oct-07 * 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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National Australia Bank Group Economics | 3

16 January 2012

flat, on average, over the last six months) and may partly reflect benign weather conditions.

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 at the end. Inflationary pressures moderating
Price indicators

mom% 0.6 0.5 0.4 0.3 0.2 0.1 0.0 -0.1 -0.2 Mar-10

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 Fed’s 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 enhanced communication about the Committee’s 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 FOMC’s 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 August announcement). 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.

Core PCE

Headline PCE Sep-10 Mar-11 Sep-11

Sources: Bureau of Economic Analysis

With readings of the economy showing improvement, including in the labour market, not surprisingly the last two meetings of the Fed’s 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 Fed’s 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 Fed’s 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 still 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.

Namely the change to forward guidance to state that economic conditions are likely to warrant an exceptionally low fed funds rate until at least mid-2013 (August meeting) and the maturity extension program and decision to reinvest agency principal payments into agency MBS (September meeting).
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16 January 2012

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 in recent 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 2½ 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 Fed’s 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 1½% 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 Fed’s survey) are more stable and remain on the low side of the historical range. Mediumterm expectations of consumers and forecasters lie within the typical historical range, although expectations implied from bond markets are slightly below historical experience preGFC.

Consumer inflation moderating
Consum er prices: PCE 6.0 5.0 4.0 3.0 2.0 Core PCE 1.0 0.0 -1.0 -2.0 Dec-01 PCE yoy %






Supported by declining commodity prices…
Commodity price indicators 600 550 500 450 400 350 Nov-09 May-10 Nov-10 May-11 Nov-11 U.S. retail gasoline prices (RHS) Index
$US per gallon (n.s.a.)

4.50 CRB commodity price index (LHS) 4.00 3.50 3.00 2.50 2.00

...and recent appreciation of the $US
Im port prices & the exchange rate 25 20 15 10 5 0 -5 -10 -15 -20 2002 2004 2006 2008 2010 Import prices excl petroleum Broad dollar index ( ) yoy%

Inflation expectations remain well anchored
5-year inflation expectations 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 2005 Professional forecasters 2007 2009 2011 Tsy bond market % Consumers

Sources: BEA, Energy Information Agency, Commodity Research Bureau, Federal Reserve, BLS, Thomson Reuters/University of Michigan, Philadelphia Federal Reserve
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16 January 2012

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