Saturday, April 4, 2009


Break in the weather?
A lull in the US economic storm

■ There may be relief in the short run
■ Consumption and housing stabilizing, government spending ramping up
■ But the financial system and wealth losses remain longer-term threats

The economy and financial system remain fragile but there are signs that in the short run at least, real GDP will return to positive growth from as early as the second quarter. Consumption and housing are showing firmer signs of stabilization, while the government spending ramp-up, together with some tax cuts, will shortly enter the growth mix. After falling heavily in the second half of last year, there are actually signs that consumer spending will be positive as early as the first quarter.

Meanwhile, new home supply is now at its lowest since 2001/2002, suggesting the new home inventory overhang is gone. Existing home inventory is still an issue given that the rate of foreclosures is still high, but we think its ability to further push down homebuilding is just about over, and that will end the drag on GDP that has been averaging about 1% annualized per quarter over the past couple of years.

Inventories will probably stop being a drag on growth, and start being a contributor from the second quarter, as inventory liquidation slows.

But it’s not all good news, because capital spending, exports, and profits are likely to keep falling for a good few quarters yet at quite a rapid rate. And the return to positive GDP growth is going to be a ‘jobless recovery’ for a while, sending the unemployment rate to over 9%. This is likely to see core PCE inflation fall to nearly zero by the end of 2010, so we expect the deflation fears to persist and intensify, despite the Fed’s continuing to rapidly create money out of thin air and expand its balance sheet.

In addition, it is far from clear that the Treasury Secretary’s latest plan to heal the financial system will work. If not, then 2010 could see the economy do a double-dip into recession again. But over the next few months, sentiment on the economy may improve for the short run.

To see full report: US Economics