lunedì 2 novembre 2009

U.S. returns to grow but still faces debt problems

For the first time since Q2 ’08, the U.S economy returned to grow in Q3’ 09, +3.5% q/q annualized, ahead of the +3.2% q/q annualized expected by the consensus of economists. Nevertheless, positive third-quarter GDP growth did not help dispel the uncertainty surrounding the US economic outlook as the fiscal stimulus implemented in Q3 comes to an end. Indeed, economic growth in Q3 was driven by the measures adopted by the Obama administration to rescue the residential and automotive sectors. A clear example is the 22.3% increase q/q annualized in third-quarter car sales thanks to the "cash for clunkers" programme, which accounted for 1% of total GDP growth. But car and home sales (-3.6% in September) returned to fall once the incentive programme ended.

Not surprisingly, the recent recovery has been looked with scepticism by consumers, as indicated by the Conference Board’s consumer confidence index, which dropped from 53.4 to 47.7 in October. The negative trend in the labour market was the main reason behind a weakening consumer confidence. Indeed, despite early signs of improvement in the economic cycle, the unemployment rate continues to remain high (9.8% in September), and is expected to deteriorate further in 2010 (above 10%). The persistent rise in foreclosures is another negative factor affecting consumers, who will likely further increase their savings rate above 3.3% of disposable income in the third quarter.

Economists, though believing that the worst is finally behind them, consider the Q3 ’09 improvement of a transitory nature and are looking for a further slowdown in Q4 ‘09, when growth should come in at 2.4% and stay at this level throughout 2010, before slightly improving to 2.8% in 2011. Therefore the "new normal" scenario set out by PIMCO bond manager Bill Gross, who projected the U.S. economy to experience many years of growth below the average of the last 60 years (3.4%), seems to be very likely.

The economic imbalances that have plunged the U.S. into recession and that are far from solved remain the most serious risk factor facing the medium-term U.S. economic prospect. As indicated by the latest GDP data, US economic growth continues to be highly dependent on personal spending, which has steadily accounted for 71% of GDP over recent quarters. With the unemployment rate likely to increase further going forward, estimating a sharp rise in personal consumption over the coming months remains somewhat risky, even though the recent stock market recovery has increased both the ratio of total household debt to total household assets and the ratio of net worth to disposable income. The household sector deleverage is likely to weigh on personal consumption and the labour market. Data from the Federal Reserve for the last few quarters, in fact, have shown that households are gradually reducing their debt pile (-168bn dollars from the record peak hit in Q2 2008), although the ratio to GDP remains close to 97% due to the GDP decline in the first half of 2009.

With companies also committed to reducing their debt level (-50bn in Q2 compared to Q1), the U.S. economy is highly unlikely to be driven by a sharp upswing in investment in the coming quarters.

While a narrowing of U.S. household and corporate debt is positive, a rise in federal debt is cause for concern. It accounted for 51% of Q2 09 GDP from 44% in 2008, and is seen mounting further in the months to come. According to the Congressional Budget Office, public debt held by private individuals should achieve 61% in 2010 and hit an all-time high of 67.8% in 2019. However, many analysts have projected an increase in the debt ratio up to 100% of GDP over the next few years. Consequently, even government spending should hardly be able to underpin economic growth in the quarters ahead.

All in all, only an increase in exports appears to be able to provide a boost to the economy, even though third quarter trade balance data showed that relying on net foreign demand may prove illusory. Indeed, a slight improvement in consumer spending was enough to widen the external deficit to 348bn dollars from 330bn in Q2 despite the weak U.S. Dollar, hence breaking a downward trend for net trade deficit that had lasted since 2007.

The problem of excess borrowing in the U.S. economy might be still far from being solved and weigh on economic growth for several years. As shown in the chart below, in fact, the total debt level, excluding state and local government debt, has neared 220% of GDP this year and is unlikely to decrease in the years to come. U.S. authorities might well decide to reduce the debt burden by increasing inflation. This would cause serious damage to the entire global economy, which would have to search for a new growth trigger.

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