US Review: Fed continues to expect solid growth for the time being

US Review
Fed continues to expect solid growth
for the time being

The Federal Reserve this week released the minutes of the November 2/3 FOMC meeting, when the Committee announced its intention to purchase another USD 600bn of longer-term Treasuries by mid-2011. According to the minutes, most Fed officials, “saw the benefits [of an additional monetary stimulus] as exceeding the costs.” The program was expected to “put downward pressure on longerterm interest rates and boost asset prices; some observed that it could also lead to a reduction in the foreign exchange value of the dollar.” The Fed’s intention, therefore, was not only to lower yields but also to lift equity prices and weaken
the US dollar. In addition, the minutes reveal that the Fed held a videoconference meeting on October 15.

During that meeting, the Committee discussed, among other things, the costs and benefits of a numerical inflation target, and a target path for the price level as well as the potential costs and benefits of setting a target for a term interest rate. No action on either of these topics was taken. Finally, the minutes included a new set of quarterly economic forecasts (cf. table).

In general, we find it hard to align the deep concerns about the economic outlook – as repeatedly stated by Chairman Bernanke and his most important deputies – with GDP growth forecasts of 3½% to 4½% over the next three years. That does not seem like an environment in which the US central bank has to go basically ‘all in’!


US economy in late summer grew
faster than initially assumed
According to the Bureau of Economic Analysis’ second estimate, US real GDP rose an annualized 2.5% in 3Q, which is half a percentage point more than assumed so far. The upward revision was triggered by stronger consumption growth, less negative net exports, and higher government spending (at state & local governments). Inventories, on the other hand, expanded less strongly than initially estimated. Corporate profits continued to expand in 3Q, although their increase (+2.8%) was the lowest in seven quarters.


According to the BEA, “the increase in unit profits reflected a larger increase in unit prices than in unit labor costs and the unit non-labor costs.” Finally, the current-production cash flow – the internal funds available to corporations for investment – decreased USD 57.8bn in 3Q. It was the first decline since 2009 and the largest drop since early 2007.

Capex spending to take a breather
Durable goods orders fell 3.3% in October. It was the largest monthly decline since January 2009. Orders in the core group (nondefense capital goods ex aircraft) declined 4.5% mom, but the less volatile 3M/3M change still stood at a healthy 9.4% annual rate in October. Shipments of capital goods ex aircraft, which are used to calculate capex spending in the GDP report, declined 1.5% in October. That is the biggest monthly decline in 1½ years. These numbers suggest that investment expenditures for equipment & software, which
surged at double-digit rates for the last four quarters, are bound to take a breather at the end of the year.

Consumer spending keeps rising
Personal income rose 0.5% in October, while consumer spending (PCE) increased another 0.4%. Real PCE was up 0.3%, while real disposable income increased 0.3% mom (+2.5% yoy). The savings rate edged up slightly to 5.7% from 5.6%. These numbers show that the economic recovery in the US is becoming more sustainable, as the improvement in the labor market is finally supporting consumer spending.

After increasing solidly over the last couple of months, real PCE in September exceeded again their pre-crisis level, and they keep trending higher. Initial jobless claims, the most timely labor market indicator, even fell to the lowest level in more than two years. But while we also think that the downward trend in claims remains intact, the latest improvement might be exaggerated. The backdrop is that the week ending 20 November is the week after Veteran’s Day. Seasonal factors expected a 22% wow spike in claims, whereas the actual increase was “only” 13%. Hence, claims might rebound next week.
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