US real GDP growth

Relief over the ending of recession in the US in the third quarter will be tempered by concerns about the outlook for consumer spending because of rising unemployment and the withdrawal of government support measures.

This week’s crucial announcement is US third-quarter gross domestic product, due on Thursday, which should show the economy expanding at a 3 per cent annualised rate after shrinking 0.7 per cent in the previous three months.

Government spending provided a strong boost to activity in the third quarter and the dollar’s weakness helped exports.

Consumer spending is seen rising 2.9 per cent (annualised), helped by tax cuts and other government support measures, but spending by businesses on equipment and services is likely to remain soft with substantial spare capacity in the US economy.

The economy saw more aggressive destocking in the third quarter with real inventories expected to fall $120bn after dropping by $160bn in the second quarter. But that slower pace of decline means inventories added about 1.3 percentage points to GDP growth in the third quarter. Destocking should slow further in the fourth quarter, providing a further boost to growth.

The GDP release should also show an increase in residential property investment for the first time in nearly four years and this week should also bring further signs of healing from the US property market.

The S&P Case/Schiller measure of house prices in 20 metropolitan areas, due out Tuesday, is seen rising for a fourth month in August, up 0.6 per cent. That would slow the year-on-year decline from -13.3 per cent in July to -11.5 per cent.

New home sales for September, due on Wednesday, are expected to come in at 440,000 after registering 429,000 in August.

However, improvements in US consumer confidence have slowed thanks to rising unemployment and concerns that jobs remain hard to find. The Conference Board measure, due out Tuesday, is seen rising to 54.3 in October after a disappointing drop to 53.1 in September.

US durable goods orders, due on Wednesday, are pointing to a weak recovery in investment spending in the third quarter. The headline measure, which is volatile because of aircraft orders, is expected to rise 0.7 per cent after a fall of 2.4 per cent in August.

The core measure (non-defence capital goods excluding aircraft) declined in July and August and remains more than 20 per cent below the same period last year.

Personal income and spending data, due on Friday, will reflect the end of the “cash-for-clunkers” scheme, with personal spending seen falling 0.5 per cent in September. Income growth remains muted and fell in real terms during the third quarter as some one-off transfer payments from government ended.

This release also contains the Federal Reserve’s preferred measure of inflation – the core personal consumption expenditure deflator – which is expected to remain unchanged at 1.3 per cent.

Some of the deflationary pressure in the US are because of the weakness in the labour market, with non-farm payrolls dropping by more than 7.2m since the downturn started.

Downward pressures on US wages and salaries will be evident in the employment cost index, also due Friday, which is expected to rise 0.5 per cent in the third quarter compared with the previous three months. This would slow the year-on-year increase in the employment cost index from 1.8 per cent to 1.7 per cent, the lowest since this series started in 1982.

The Fed does not want to take any risks with the US economy and has indicated that interest rates will remain at ultra-low levels for the foreseeable future. However, a strong third-quarter GDP figure will strengthen expectations that the normalisation of monetary policy could arrive earlier.

“The GDP figure will be important, but how the Fed chooses to respond will have greater importance for the dollar,” said Brian Kim of UBS. “If the Fed stands ready to gradually reduce liquidity provision to the market due to improving growth prospects, risk appetite may stutter instead of consolidating.”

In the eurozone, the European Central Bank will also be watching price pressures, particularly as the strengthening euro is in effect tightening financial conditions across the region.

Preliminary German consumer price inflation for October, due on Wednesday, is expected to remain weak at 0.1 per cent year on year after a fall of -0.5 per cent in September.

The preliminary estimate for eurozone consumer price inflation is expected to remain in negative territory at -0.2 per cent year-on-year in October after a fall of -0.3 per cent in September. Eurozone inflation is likely to climb sharply by the end of the year, nearing 1 per cent, due to rising oil prices and base effects.

The European Commission’s survey of consumer and business confidence is due on Thursday. Both UK and eurozone consumer confidence measures are expected to edge higher in October, in contrast to the US where the improvement in consumer sentiment seen earlier this year appears to have stalled. Rising unemployment could slow the pace of improvement in eurozone consumer confidence, while the realisation that the UK economy remains mired in recession could weigh on sentiment on this side of the Channel.

Interest rate decisions are due from Norway and New Zealand on Wednesday and from Japan on Friday.

Norway is expected to increase its policy rate by 25 basis points to 1.50 per cent, making it the second G10 nation to tighten monetary policy following Australia’s move earlier this month. Norway’s inflation is running close to the central bank’s 2.5 per cent target and output has started to expand once more.

New Zealand’s policymakers have started to sound more hawkish but interest rates are expected to remain on hold at 2.5 per cent until 2010.

Japan is also expected to maintain its current monetary policy stance, but the central bank has upgraded its assessment of the economy’s performance, noting “the economy has started to pick up”.

The Bank of Japan’s programme to buy commercial paper and corporate bonds has not been used much recently given the recovery of financial markets. The BoJ is expected to confirm that the programme of buying of commercial paper and corporate bonds will end as scheduled in December, so there is more interest in whether any changes will be made to the special funding programme designed to support corporate finance. The BoJ has already said it is reviewing this scheme that allows banks to borrow up to the value of their holdings of corporate debt from the central bank at 0.1 per cent.

While an extension to the scheme on a smaller scale is thought possible, the BoJ does appear to be preparing the ground for its exit strategy for this key programme to support corporate finance.

However, Japan’s policymakers are expected to emphasise that any changes to these unconventional support measures are technical adjustments and not a signal that an exit from the current ultra-accommodative monetary policy is approaching.

Masaaki Kanno of JPMorgan says: “We believe that the BoJ will maintain its ‘low for long’ policy with the 0.1 per cent policy rate unchanged throughout 2010 as deflationary pressures will remain in place.”

The persistence of the threat of deflation will also be a key theme of the BoJ’s latest Outlook Report, due on Friday, which will provide the first assessment of growth and inflation in the fiscal year 2011.

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