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Global Outlook

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US Outlook − Out of the woods

Wed, Sep 23 2009, 07:36 GMT
by Peter Possing Andersen, Signe Roed-Frederiksen

Danske Bank A/S

• A significant boost from the inventory cycle, fiscal stimulus, a turn in housing and a fast improvement in financial conditions will lift growth above trend in the current quarter and the following two.
• Positive job growth is key for underlying demand and the longerterm outlook. We expect employment to be back in black by yearend, but a moderate slowdown in growth in mid-2010 remains a risk.
• Headline inflation has troughed and will pick up to 2.5-3% by year end. Core will continue its gradual slowing, with a risk of dipping below 1% next year.
• The Federal Reserve will not accommodate further, but is set to remain on hold for a considerable while. Rate hikes will not be on the agenda before late next year at the earliest.

Recovery on track for the coming quarters

It is clear by now that the US economy is recovering from the recession at a speed that is even faster than we anticipated three months ago. From being mostly confined to the manufacturing sector, the evidence of improvement has grown stronger in other areas as well, most notably in the housing market and business investments outside structures.

Consequently, we have revised our forecast for the final quarters of 2009 and the first quarter of 2010 up to 4.6% q/q AR, 4.1% q/q AR and 4.0% q/q AR respectively, but continue to see risk of a moderate slowdown in mid-2010. This leaves annual GDP growth in 2009 at -2.3% and at 3.2% in 2010.

More upside from the manufacturing sector

The recovery in the manufacturing sector that we have argued for since early this year is well underway. The large gap between demand growth and production growth is still far from closed and the process has further to run. We believe that the manufacturing recovery will prove stronger than the current consensus view. We look for the ISM index to reach 55-60 over the coming three months and to stay in this interval at least until year-end.

Part of the pick-up in production seen lately can be attributed to the auto sector as the “cash-for-clunkers” incentive scheme has unleashed a chunk of pent-up demand for autos (see Research US: Auto sector to boost H2 growth). However, evidence of improvement is by no means confined to the auto industry. In the latest ISM report 13 sectors reported growth in new orders and production while only three reported contraction.

• Download full US Outlook with charts

Published on  Wed, Sep 23 2009, 07:42 GMT