US recovery sags but will not trigger stimulus spending: QNB Group Sun |
The Peninsula - 02 July, 2012
The optimism in the early part of the year that the US economy was rebounding has now faded, according to QNB Group analysis, due to a series of disappointing economic indicators. However, the picture does not currently seem to be gloomy enough to motivate further stimulus as evident in the latest decisions by the US Federal Reserve (the Fed), a news release said yesterday.
On June 20, the Fed revised down its forecast for real GDP growth in 2012 by half a percentage point to within a range of 1.9 to 2.4 percent. This came after growth slowed to 1.9 percent, on an annualised basis, in the first quarter the year. Although this rate of growth is still healthy compared to Europe, which is undergoing recession, the US economy is not expected be able to create sufficient jobs to substantially improve the situation in the labour market. The Fed simultaneously revised up its year-end unemployment forecast to 8.1 percent, close to the current level of 8.2 percent, recorded at the end of May.
The US economic outlook varies across different elements of the economy. The government is reducing its spending, as it seeks to narrow its budget deficit, which reached 8.7 percent of GDP in 2011. In the process it is reducing the public sector payroll.
Job creation has slowed in recent months. Only 69,000 net non-farm jobs were created in May, the fourth month in which job creation has declined, compared to a recent peak of 275,000 in January. Within this figure, the private sector created 82,000 jobs but the public sector shed 13,000.
Over eight million net jobs were shed in 2008-10 but, since employment started to recover in October 2010, only about three million have been created to replace them. This is why the unemployment rate is still very high by historical standards.
A key measure of corporate activity, the purchasing managers’ index (PMI), came in at 53.5 in May. This was slightly down on April, but still above the 50-point mark, which is seen as the dividing line between expansion and contraction.
The benchmark consumer confidence index was also a little off its recent peak, at 64.9 in May, but this is still strong in comparison to recent years. Consumer confidence however is not yet translating into improved retail sales, which were down by 0.2 percent year-on-year in May. Falling petrol prices, which brought annual inflation in May down to a 16-month low of 1.7 percent, should now boost consumers’ disposable incomes which might lead to improved retail sales.
There is, however, a moderate ongoing recovery in the housing market, as attractive prices and low interest rates encourage home buyers. Despite moderate recovery, an overhang of foreclosed properties continues to drag on the housing market.
Overall, the US economy is neither vibrant enough to address unemployment nor weak enough to necessitate immediate government action. This is why the Fed look a moderate approach at its June 20th Meeting. It reaffirmed that it would keep its benchmark interest rates near zero until 2015 and extended an existing program termed “Operation Twist”. This entails swapping short-term bonds for long-term ones, bringing down long-term interest rates and thereby encouraging borrowing and investment.
Despite these issues the US economy, it continues to look somewhat robust in comparison to many other developed countries, according to QNB Group. This is reflected in stockmarket results. Despite recent falls, US markets remain in positive territory for the year, compared to losses in European markets.
If the situation in Europe or emerging markets were to deteriorate further and cause US growth to trend significantly below the Fed’s forecast range, then QNB Group expects that it would take further decisive action to support the economy.