Global Developed Markets Economic Outlook Q1 2012

United States and Canada: US Recovery Gains Traction, Fed Still Cautious

Most recent activity indicators point to a modest improvement in the US economic outlook for 2012, with American consumers becoming slightly more optimistic about prospects. Given that US consumption accounts for approximately 70% of the country's gross domestic product (GDP) and 15% of global GDP, a healthy US consumer is an essential ingredient for a sustainable recovery to take hold. Consumer spending rose by 2% in the three months to December, compared with 1.7% in the three months to September and 0.7% in the three months to June, according to a preliminary estimate by the US Commerce Department in January.

US GDP grew at an annual rate of 2.8% in last year's fourth quarter, the fastest pace of expansion since the second quarter of 2010, accelerating from growth of 1.8% in the third quarter and 1.3% in the second quarter, lifting GDP growth for 2011 as a whole to 1.7%, slower than the 3% expansion in the previous year. Business investment expanded at a much slower rate, however. Non-residential fixed investment grew by just 1.7% in the fourth quarter, after growing by 15.7% in the three months to September and 10.3% in the three months to June. Much of the fourth-quarter gain in output was driven by inventory growth, as businesses rebuilt stocks responding to an upturn in demand, adding almost 2 percentage points to growth, after acting as a drag in the previous quarter; increased vehicle output contributed 0.3 percentage points to headline GDP.

Real final sales, which measure GDP less changes in private inventories, rose by 0.8%, slowing from a 3.2% increase in the three months to September. Cutbacks in overall government expenditures continued to weigh in the final quarter of 2011, declining by 4.6%, as federal, state and local governments all reined in spending. Defence spending cutbacks also acted as a headwind, reducing government spending and investment by 7.3%, following a 2.1% decrease in the three months to September. US defence outlays declined by 12.5% in the three months to December, a fall that is estimated to have knocked up to 0.8% off headline GDP growth. Durable goods orders, meanwhile, rose by 3% in December, while the Institute for Supply Management's purchasing managers' index (PMI) rose to 53.9 in the same month, the highest survey reading since April, and up from 52.7 in November, where a reading above 50 indicates US manufacturing activity is expanding.

Confidence, as measured by the Conference Board's consumer confidence index, rose in December to its highest level since last April, which augurs well for President Barack Obama's re-election chances in November. While the recovery in his approval ratings partly seems to reflect the strengthening trend in key indicators, it could also reflect disenchantment with the Republican party, following a disagreement in December over extending a cut in payroll taxes, which was eventually passed by Congress but which left the lasting impression that Republicans in the House of Representatives are intent on opposing the president on key economic issues.

Employment indicators signal a recovering US economy, with the unemployment rate falling sharply in November, to 8.6% of the workforce, edging lower again in December, to 8.5%, the lowest level in almost three years. At the same time, private-sector hiring is also increasing, with 325,000 new hires in December, according to the ADP report, following November's 204,000 increase, suggesting a fourth consecutive month of private-sector employment growth.

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