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US GDP forecast - time for growth or more QE?

Predictions being set for the US' Q4 2011 GDP announcement on 27 January

So the widely anticipated US GDP report for the fourth quarter of 2011 is out on 27 January - but will it signal a sign of better times to come or spark a downturn in sentiment and possibly another wave of quantitative easing in the States?

So here are the actual numbers for US GDP Q3 2011 and a forecast from the US Department of Commerce:


Source: US Department of Commerce and Monument Securities

Independent broker Monument Securities points out that- although there were marked increases in consumer confidence in Q4 2011 - there is more of a story behind the statistics than when looking at-face-value.

Monument Securities' chief economist Stephen Lewis says:

Growth in private consumption is likely to have been slightly stronger than was recorded in the preceding quarter.

This is largely a statistical quirk, however.

Consumer spending rose strongly in September but levelled off thereafter. Full figures are not yet available for December but retail sales
data for that month suggest that spending growth was even more sluggish then than earlier in Q4. That means that this
important component of demand was imparting very little momentum to GDP growth as the US economy entered the current

While confidence is improving, other factors, most notably a continuing squeeze on households’ real disposable
incomes, are holding back spending

Despite the strengthening in labour market conditions, these real incomes were lower in November than they had been during the second quarter of last year. Since households are net recipients of interest income, they are among those losing out from the Fed’s ultra-accommodative monetary policy.

Furthermore, inflation is constraining their spending power; it is headline prices they have to pay, not the core prices on which policymakers focus. The pattern of government consumption in recent quarters has featured growth in federal spending, offset by contraction in state and local
governments’ outlays.

There appears to have been no let-up in retrenchment at the state and local level, though state finances at least are now improving.

Furthermore, Lewis also points out that while business investment was one of the main drivers of growth through 2011 - the "durable goods sales data for October and November suggest the pace of business spending on equipment slowed markedly in Q4." 

US companies appear to have taken advantage of temporary tax breaks on capital spending well before they expired at the end of
last year. Construction data further point to a slight decline in this component of spending after the spike in Q2 and Q3.
Overall, business spending probably contributed nothing to GDP growth in Q4. Housing investment, on the other hand, may well
post its strongest quarter since 2010 Q2, helped by the weather. So shrunken is the base for housing outlays, however, that
even an appreciable upturn in activity in this sector makes only a moderate addition to GDP. Indeed, overall sales to domestic
purchasers, an indicator of final domestic demand in the US economy, probably expanded more slowly in Q4 than in Q3.

Only today, Ira Jersey, director of US rates strategy at Credit Suisse in New York told the media that a third round of quantitative easing could be implemented in the third quarter of this year:

“We do think the Fed is going to do another round of asset purchases later in the quarter, probably aiming for April. We are growing, we just don’t feel prosperous. It is a part of the job of the Fed to assure prosperity, one of the ways to do that is to kick- start housing.”

In December 2011, Euromoney published its findings on how the US is part of an elite of highly indebted developed nations and bond vigilantes have attacked some of the eurozone states but have largely ignored the US.

Moreover, as the eurozone sovereign debt crisis resolves itself, the US fiscal position will attract more scrutiny.

In the report, it was addressed why policymakers are so complacent about the US fiscal debt issues: 

The financial markets have not yet forced them to act, because of several important factors that are keeping demand for treasuries strong, and thus interest rates low:

—The US treasuries market is the largest and most liquid in the world.

—Investors consider treasuries safe haven securities, which became particularly evident during the 2008-09 global financial crisis and more recently during the European sovereign debt crisis. Even after the US credit rating was downgraded by Standard & Poor’s last August, treasury yields fell.

—Banks and non-bank institutions, such as pension funds, insurance companies and mutual funds, hold treasuries for liquidity and capitalization purposes. Currently, they hold about 23% of US outstanding marketable debt.

—As a result of massive quantitative easing, the Federal Reserve purchased large quantities of treasuries. The Fed’s portfolio currently has about $1.67 trillion of treasuries, or about 17% of outstanding debt.

—Foreign central banks hold large amounts of treasuries (currently 35% of outstanding debt), as the US dollar is a reserve currency. Although some of its status has been eroded since the euro came into existence, 60% of the world’s currency reserves are still in US dollars.

For the full report, check out  the latest version here

For more on the US dollar and foreign exchange market, check out 

- Euromoney Skew Blog

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