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US: Recovery will take hold in 3Q09

Mon, Oct 26 2009, 09:47 GMT
by BBVA Bancomer Team

BBVA Bancomer

• Fiscal stimulus provided a boost to consumer spending
• The decline of non-residential and residential investment will ease
• Significant economic slack will cause recovery to be slow

Consumer spending will drive economic growth

The U.S. economy is expected to embark down the path of recovery as we anticipate a quarterly annualized growth rate of 4.1% in 3Q09 following four consecutive months of contraction.

Personal consumption expenditures are poised to lead the expansion. The Cash for Clunkers program drove up auto sales to average 11.5M in 3Q09, compared to 9.6M in 2Q09, significantly boosting consumption of durable goods. While the effects of this stimulus program were only transitory, spending on non-durable goods also rose, which could be an indication that demand is resuming even amid ongoing job losses.

In contrast, non-residential investment will continue to decline, albeit at a slower pace. On a positive note, industrial production of high tech goods rose 2.8% in 3Q09, indicating that investment in equipment and software, which makes up 70% of the total, may increase modestly. Nevertheless, the structures component is expected to continue to decline sharply due to deteriorating fundamentals in the commercial real estate market and limited access to credit.

Residential investment will also continue to adjust downward for the fifteenth consecutive month as the market remains weak, but the pace will slow significantly. Housing starts increased as improvement in the housing market boosted builders’ confidence, but total construction spending declined.

Expansion in both exports and imports illustrate that demand is picking up both at home and abroad. In fact, exports are expected to grow at a faster rate than imports, which will turn the trade dynamics to favor economic growth in the third quarter.

Recovery will be slow going forward

While economic expansion has taken hold, activity is still far from that of previous years and growth is expected to be slow. The labor market is forecasted to remain weak as job destruction continues into 2010 and the prospect of a jobless recovery is likely. As a result, consumption will continue to be constrained by low household wealth, the high savings rate and tight credit markets. Furthermore, non-residential investment will continue to be plagued by weak demand, limited access to credit and deterioration in the commercial real estate market. Nevertheless, net exports could continue to be supportive as stronger growth in some emerging economies could increase foreign demand for U.S. goods beyond domestic demand for imports.

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Published on  Mon, Oct 26 2009, 09:50 GMT