Thursday, November 25, 2010

US: still muddling through...

Our view that the US would do little better than "muddle through" over the latter part of 2010 and the early part of 2011 was reinforced with the release of a plethora of partial activity data overnight.

First the good news. Consumer spending rose 0.4% m/m in October, up from an upwardly revised 0.3% in September. Households are starting to spend again with the early signs being that consumption may put in a similar contribution to Q4 GDP as it did to Q3. Incomes were up 0.5% and the savings rate blipped up to 5.7%, showing households are still working hard to repair their balance sheets. This does bode well for future consumption, once balance sheets are back in order. That will take some time.

So we still don't see consumption being a key driver of this US recovery. Jobless claims fell 34,000 to 407,000, but this and other labour market data has us believeing jobs growth will track along the +150k mark over the next few months, which will see the unemployment rate remain stubbornly high at around 9.5%.

The not so good news is that purchases of new homes dropped 8.1% in October, showing the housing market will continue to be a drag on the recovery. In particular, this will see households remain reluctant to open their wallets too much further.

Durable good orders fell 3.3% in the month. That was, however, after an upwardly revised 5.0% in September. This data is very volatile. If you look at the 3m/3m annual rate its consistent with about 3.0% growth, which fits in with all the other data that indicates the US econony is still growing, albeit not at the pace it was earlier in the recovery.

So muddling through remains the order of the day. We agree with the Fed's downward revision to US GDP growth in yesterdays FOMC minutes. As previously discussed, while good work is going on in households to repair their financial positions, we are not as optimistic as the Fed on the contribution consumption will make to GDP growth in 2011. We still look to net exports to be the key contributor to this US recovery, and that's going to take some time.