United States The day of fiscal reckoning CN vnt oiuearuy di Res rkis Lq veuel FAIBLE LOW
Overview The U.S. economy is facing a challenging 2013 as uncertainties over the fiscal situation remain, specifically Medicare reform. Uncertainty, weak income growth, low confidence (falling back in December) and still high unemployment bode poorly for the U.S. consumer. Businesses will also face a difficult environment as aggregate demand weakens, causing investment to fall and putting upward pressure on unit labor costs. The Federal Reserve is all but impotent now as each successive round of quantitative easing (QE) has become less effective and has raised inflationary risk. Overall the U.S. is likely to grow at a moderate pace +1.9% rate through 2013 and to gradually pick-up in 2014 (+2.5%).
Economic Outlook no. 1189-1190 |Macroeconomic, Risk and Insolvency Outlook
Weakening consumer, moderately expanding expenses in 2013-14. The U.S. consumer is facing significant headwinds which will keep consump- tion growth at a sub-par 1.9% in 2013 and a slightly stronger 2.6% pace in 2014. Real disposable personal income and personal consumption fell in October and August, leaving the year/year rates at a very weak 1.2% and 1.3% respectively. Consumer confi- dence plummeted in the first half of December, boding poorly for post-holi- day spending. Continued high unem- ployment will further weigh on consumption. One bright spot is the rebounding housing market; record low mortgage rates and low inventory should continue to support the sector.
Challenges for business yet insolven- cies still fall. Unit labor costs have risen only 0.1% in 2012, allowing busi- ness to make profits even with weak GDP growth. But profits in 2013 will come under pressure for two reasons; aggregate demand may be weaker in H1 2013, and the investment required to shrink future unit labor costs actually fell 2.2% in Q3 2012. In addi- tion, future business investment indi- cated by new orders for capital goods (ex-defense and aircraft), have fallen 7.1% y/y. Therefore profit growth may be suppressed in 2013, but probably not enough to keep insolvencies from falling around 7%.
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Fiscal situation still unstable. Even with resolution of the fiscal cliff, a “grand bargain” to reduce the coun- try’s debt will remain elusive. Moody’s recent threat to downgrade the U.S. wasn’t based on weak finances, it was based on the lack of a plan to make them better. Entitlement reform, parti- cularly for Medicare, is the key to brin- ging the budget under control. But the political will to make these reforms is absent in the face of constituents who benefit from the program. Unless Medicare is reformed or U.S. GDP growth soars, the budget will continue to be the single most divisive issue going forward.
Monetary policy scrambling. Monetary policy is becoming more experimental and less effective. The Fed started a fourth round of quantita- tive easing (QE4), buying 45billion USD of U.S. Treasuries monthly, in addition to the 40 billion USD of mortgage backed securities it is purchasing under QE3. Each round of QE becomes less effective, so it’s unlikely that QE3+4 will help the economy, and they raise inflation risk. The Fed also attempted to promote clarity by adop- ting thresholds which would trigger tightening; unemployment below 6.5% and inflation above 2.5%. But the Fed combined these hard targets with other less specific measures, resulting in even less clarity.
Trade deficit to remain flat. Imports in 2Q and 3Q fell as consumers lost their taste for more expensive foreign goods, shrinking the U.S. trade deficit by 15%. But given expectations of improve- ment in Europe and China in 2013, the trade deficit is likely to remain essen- tially unchanged in 2013. In a benefi- cial parallel, the U.S. has become less dependent on credit from China which has fallen from 13.5% of U.S. public debt in mid-2011 to 10.3% in September 2012._DN
To watch…
>Continued high unemployment, weak income growth, falling confidence and anemic consumption. >Continuing rebound in the housing market. >A stumbling manufacturing sector needs to revive, as does business investment. >More Fed experimentation, weaker USD exchange rate. >Entitlement and tax reform._