U.S.

economy: The outlook is cloudy
• History doesn’t repeat itself, but it does rhyme. Just compare what is happening so far this year to what was happening not just at a similar juncture last year but in 2010 as well. The majority of the data releases have been coming in below expectations over the past few months (Chart 1). • Growth in the first quarter was not recession-like by any means, but 1.9% is just not that good when taking the balmiest winter conditions since record-keeping began into account (Chart 2). The outlook is cloudy; weather effects continue to distort the picture but it looks as if momentum is subsiding. Consequently, what many pundits are expecting is that the Fed will ride to the rescue with some sort of additional easing when Operation Twist ends in June. • The recent developments in Europe and the weak employment report for May has increased the probability of QE3 being announced at the June or Jul/Aug meeting. • Indicators give us a bit of a mixed signal as for example ISM for manufacturing is above the 50-level (Chart 3) at the same time as Philly Fed in May dropped sharply. • We revise our forecast for GDP-growth 2012 downward marginally to 2.3% (from 2.5% in Nordic Outlook May).
Key data Percentage change

FRIDAY 8 JUNE 2012 SEB Economic Research +46 8 763 85 06

2010 2011 2012 2013 GDP Unemployment* Inflation Core inflation
* Per cent of labour force Source: SEB

3.0 9.6 1.6 1.0

1.7 9.0 3.1 1.7

2.3 8.2 2.2 2.0

2.7 7.9 1.4 1.4

Economic Insights

INCREASED PROBABILITY FOR ADDITIONAL QE FROM FED • The Fed actually revised its own economic forecasts upwards at the April meeting. One way to look at the situation is that the stage is set for additional easing; if the U.S. economy shows more signs of slipping the liquidity taps will be turned back on. Bernanke said the following at the press conference after the April meeting: “We remain prepared to do more as needed to make sure that this recovery continues”. • While we think that further policy action will materialise, a new program already at the June 19-20th might be too soon. Market-based inflation expectations are higher now compared to when Bernanke loudly hinted at QE2 at the Jackson Hole meeting in 2010 and when Operation Twist was announced last autumn (Chart 4). Core inflation is trending higher as well (Chart 5). However, the recent developments in Europe and the weak employment report for May has increased the probability of QE3 being announced at the June meeting. • Gasoline prices are declining again (Chart 6) which is why confidence is rising according to Michigan (Chart 7). By contrast, the Conference Board index dropped in May which is probably reflecting the renewed labour market weakness (Chart 8 and 9) as well as poor income fundamentals. House process seems to have levelled off but our model still points at an increased saving rate among households and that the deleveraging process is not over yet (Chart 10 and 11). • According to the bond market the economic outlook is weak. Have a look at the TIPS yield which is a proxy for real GDP growth. 10 years ago the yield on 10-year TIPS was close to 2%, and over the ensuing 10 years real GDP growth slowed to only 1.7% on average (weakest decade on record). The real rate is now below zero (Chart 12).

Chart 5: Core inflation above 2 per cent
Per cent
6 5 4 3 2 1 0 -1 -2 -3 07 08 09 10 11 12 6 5 4 3 2 1 0 -1 -2 -3

CPI

Core-CPI
Source: Reuters EcoWin

2

Economic Insights

Chart 9: U.S. unemployment rate
Per cent
12 11 10 9 8 7 6 5 4 3 2 50 55 60 65 70 75 80 85 90 95 00 05 10 12 11 10 9 8 7 6 5 4 3 2

Women

Men
Source: BLS, SEB

Chart 15: Current account deficit moving sideways
% of GDP, percentage change
5.0 2.5 0.0 -2.5 -5.0 -7.5 -10.0 90 5.0 2.5 0.0 -2.5 -5.0 -7.5 -10.0 92 94 96 98 00 02 04 06 08 10 12

General government fiscal balance Current account balance
Source: Reuters EcoWin, SEB

3