Ekonomika v USA

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This publication is classified as objective research. Please refer to important information at the end of the report.

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Market Economics 11 July 2011

US Daily Economic Spotlight

The Proverbial FanJulia Coronado

There was virtually nothing good about the June employment report. On theone hand, after what we expect will be a growth performance of just 1.7%saar in H1 2011, which is below what we estimate to be the economy’spotential of 2.0%, it is not terribly surprising that hiring has slowed to a crawl.To the degree some of the factors weighing on growth are expected to betransitory, hiring should pick up gradually over the second half of the year.On the other hand, many of the factors restraining growth are not transitorybut structural in nature, something that was in full evidence in the Junereport. The US economy has basically been treading water on a population-adjusted basis thus far in this recovery as strong sectors that have benefited

from the more robust global economic backdrop have not provided enoughmomentum to overcome domestic weakness driven by structuraladjustments.

This is a sobering backdrop for ongoing budget discussions as fiscalausterity will only add to structural headwinds. It will also be a challenge forChairman Bernanke to provide a coherent and reassuring message at thesemi-annual monetary policy testimony before Congress this week. The datathis week will provide some reassuring reminders of the coming tailwind fromfalling inflation as both the PPI and CPI are projected to decline in the Junereadings. Retail sales are also expected to register a second nominaldecline in June owing to falling gas prices and auto sales. We are off to achoppy start to Q3, and the US economy remains vulnerable to adverseshocks from abroad.

Chart 1: Hiring Losing Steam in Both Surveys

Source: Reuters EcoWin Pro

The June employment report was dismal across the board. Nonfarm payrollswere much weaker than expected at 18k, with 57k in private hiring and 39kin government job losses. The unemployment rate rose to 9.182% from9.053% but would have risen to 9.4% had the participation rate not fallen to64.06% from 64.22%. The participation rate dropped 0.6pp among peopleaged 20 to 24, in large part reflecting discouragement over job prospects.This rise in the unemployment rate also reflected that the household surveyshowed job losses of 445k, the weakest reading since December 2009. This

performance is far worse than the recent elevation in initial jobless claimswould suggest. The details of the household survey showed that while theflow of workers losing their jobs is higher than earlier in the year, the flow ofnew hiring by firms has also slowed noticeably, something not captured by

There was virtually nothing goodabout the June employment report.On the one hand, after what weexpect will be a growthperformance of just 1.7% saar in H12011, which is below what weestimate to be the economy’spotential of 2.0%, it is not terriblysurprising that hiring has slowed toa crawl.

To the degree some of the factorsweighing on growth are expected tobe transitory, hiring should pick upgradually over the second half ofthe year.

On the other hand, many of thefactors restraining growth are nottransitory but structural in nature,something that was in full evidencein the June report.



US Daily Economic Spotlight, 11 July 2011 2


jobless claims. Given the lack of optimism reflected by the decline in theparticipation rate, it appears that some of the weakness in recent monthsreflects a very poor hiring environment for younger workers in particularrather than a marked acceleration in layoffs. Rising prices have not onlytaken their toll on consumer purchasing power but also on firms’ willingnessto hire and expand.

Chart 2: Unemployment Rate Rising Despite Falling Participation


The details at the sector level suggest a number of structural adjustments inthe economy continue to present material headwinds. The financial sectorshed 15k jobs after adding 14k a month prior, state and local governmentslet go 25k workers after a downward-revised firing of 46k a month prior, andthe construction sector shed 9k people after losing 4k the month prior.Manufacturing returned to hiring adding 6k workers after letting go 2k amonth earlier, although this is well below the pace that prevailed earlier inthe year. The leisure and hospitality sector also rebounded adding 34kworkers after firing 24k in May as foreign visitors lured by a weak dollarcontinue to boost the tourism industry. One disturbing development is thatthe private education and health care industries added no workers, the firsttime that has happened since March 2009.

Chart 3: Real Wage Growth Negative on High Inflation, Few Wage Gains


Education presents a particular trouble spot that is likely to get worse beforeit gets better. Private education let go 17k workers in June after a 10k loss amonth earlier and after adding an average 6k per month in the twelvemonths ending in April. Both colleges and parochial schools are responding

to continued pressure from budget shortfalls. This shrinkage in education islikely to weigh on upcoming reports. Also, public school teachers aregenerally on July-to-July contracts, so most school districts in the countryhave handed out pink slips at the end of the current school year, which will

The US economy has basicallybeen treading water on apopulation-adjusted basis thus farin this recovery as strong sectorsthat have benefited from the morerobust global economic backdrophave not provided enoughmomentum to overcome domesticweakness driven by structuraladjustments.

This is a sobering backdrop forongoing budget discussions asfiscal austerity will only add tostructural headwinds. It will also be

a challenge for Chairman Bernanketo provide a reassuring message atthe semi-annual monetary policytestimony before Congress.





show up as job losses when the contracts expire in July. If most districts arecutting in the neighborhood of 2.5% as is estimated by the United Federationof Teachers, this could mean a loss of 250k jobs. Most of this is above andbeyond seasonal norms and so would show up as state and local job lossesin the July employment report. Health-care hiring has also slowed, andhospitals actually let go 4k workers in June, the first job loss there since Mayof last year. The loss of education and health care and steady job creating

sectors presents a risk to the H2 rebound.

Chart 4: Structurally Slow


The June employment report highlights that the labor market, the momentumof which tends to follow GDP growth with a roughly one quarter lag, issuffering from the lackluster first half of the year. Real consumer laborincome growth has turned negative as nominal wage and salary incomegrow at only a modest pace and headline inflation surged. Falling inflation inthe months ahead will partially restore some lost purchasing power forhouseholds and should boost spending, and eventually hiring. Even if the H2pick up is realized, however, is unlikely to alter the fact that the US seems tobe stuck in a slow growth-trap in the current recovery. Theemployment/population ratio fell to 58.2% in June from 58.4%, still stucknear the lows of the cycle, and the U6 unemployment rate jumped to 16.2%from 15.8% on the spike in discouraged workers. In addition to affecting thepolicy discussions this week, this bleak employment picture will be juxtaposed against the corporate earnings season for Q2 which be kicked offwith Alcoa’s announcement Monday. The stark contrast between continuedrobust corporate profits and sagging economies in most of the industrializedworld is only intensifying. Meanwhile, the market will have to digest its firstset of Treasury auctions without the support of QE2. Buckle your seatbelts.

In addition to affecting the policydiscussions this week, this bleakemployment picture will bejuxtaposed against the corporateearnings season for Q2 which bekicked off with Alcoa’sannouncement Monday. The starkcontrast between continued robustcorporate profits and saggingeconomies in most of theindustrialized world is onlyintensifying. Meanwhile, the marketwill have to digest its first set ofTreasury auctions without thesupport of QE2. Buckle yourseatbelts.





% Q/Q SAAR Q1 Q2(1) Q3(1) Q4(1) Q1(1) Q2(1) Q3(1) Q4(1)2009 2010 2011(1) 2012(1)

Real GDP 1.9 1.5 2.5 3.5 2.5 2.5 3.0 3.0 0.2 2.8 2.3 2.8

Consumer expenditures 2.2 0.5 2.0 3.5 2.5 2.5 3.0 2.5 0.2 2.6 2.0 2.6

Government consumption -5.8 -0.2 -0.9 -1.2 -0.9 -0.6 -0.6 -0.6 0.8 1.1 -2.0 -0.7

Residential investment -2.0 3.0 6.0 8.0 10.0 10.0 16.0 18.0 -13.4 -4.6 3.7 13.4

Equip. & software investment 8.8 8.0 9.0 12.0 3.0 7.5 9.5 10.0 -4.9 16.9 9.4 7.5

Structures investment -14.8 -5.0 0.0 4.0 4.0 6.0 8.0 8.0 -26.5 -4.0 -4.2 6.5

Net exports -393 -345 -331 -336 -339 -335 -331 -323 … … … …

Final sales 0.6 2.3 2.4 3.1 1.9 2.5 3.2 3.0 -0.2 2.4 2.1 2.7

Ch. inventories (bn 2000$) 55.7 30.7 32.7 43.7 58.7 57.7 53.7 53.2 … … … …

Production Q1 Q2(1) Q3(1) Q4(1) Q1(1) Q2(1) Q3(1) Q4(1)2009 2010 2011(1) 2012(1)

Industrial output (% y/y) 5.3 4.5 3.6 3.5 3.2 3.1 3.5 4.0 -11.2 5.3 4.2 3.4

Labor Q1 Q2(1)

Q3(1)

Q4(1)

Q1(1)

Q2(1)

Q3(1)

Q4(1)

2009 2010 2011(1)

2012(1)

Employment (avg mthly chg) 166 87 115 175 200 175 175 150 -422 78 136 175

Unemployment rate (%) 8.9 9.1 9.2 9.0 8.8 8.6 8.5 8.3 9.3 9.6 9.0 8.6

Inflation Q1 Q2(1) Q3(1) Q4(1) Q1(1) Q2(1) Q3(1) Q4(1)2009 2010 2011(1) 2012(1)

CPI % y/y 2.2 3.4 3.5 3.3 2.4 1.3 1.7 2.0 -0.3 1.6 3.1 1.9

Core CPI % y/y 1.1 1.5 1.7 1.9 1.8 1.6 1.5 1.6 1.7 1.0 1.5 1.7

Core PCE % y/y 0.9 1.2 1.5 1.5 1.4 1.2 1.1 1.2 1.5 1.3 1.3 1.2

Trade & Fiscal Q1 Q2(1) Q3(1) Q4(1) Q1(1) Q2(1) Q3(1) Q4(1)2009 2010 2011(1) 2012(1)

Current account (%GDP) -0.8 -0.8 -0.8 -0.7 -0.6 -0.7 -0.7 -0.6 -2.7 -3.2 -3.0 -2.6

Federal budget bal. (%GDP) (2)

-12.3 -9.1 -11.0 -9.0 -9.5 -7.2 -9.2 -8.7 -10.0 -8.9 -10.5 -8.6

Interest Rate Forecasts

Interest rates(3)

Q1 Q2(1) Q3(1) Q4(1) Q1(1) Q2(1) Q3(1) Q4(1)2009 2010 2011(1) 2012(1)

Fed Funds Rate (%) 0.25 0.25 0.25 0.25 0.25 0.25 0.50 0.75 0.25 0.25 0.25 0.75

3-Month Rate (%) 0.30 0.25 0.30 0.45 0.75 0.90 0.90 1.15 0.25 0.30 0.45 1.15

2-Year Rate (%) 0.83 0.45 0.75 1.00 1.50 2.00 2.25 2.45 1.14 0.61 1.00 2.45

5-Year Rate (%) 2.27 1.60 2.00 2.40 2.75 3.20 3.40 3.60 2.68 2.01 2.40 3.60

10-Year Rate (%) 3.47 3.00 3.25 3.75 3.90 4.00 4.15 4.25 3.84 3.29 3.75 4.25

30-Year Rate (%) 4.51 4.20 4.40 4.80 4.80 4.80 4.80 4.80 4.64 4.34 4.80 4.80

10Yr Swap (%) 3.57 3.15 3.45 4.10 4.30 4.40 4.60 4.75 4.01 3.41 4.10 4.75

Source: BNP Paribas

Economic ForecastsQ4/Q42011

2011

2011

2011

2012

2012

Footnotes: (1) Forecast (2) Fiscal Year (3) End Period

Figures are year-on-year percentage changes unless otherwise indicated

2011

Year

Year

Year

Year

2012

2011 2012

Year

2012

2012





The Week’s Data

Economic Data Time Last BNPP (f) Consensus (f)

Tuesday

NFIB Small Business Optimism : Jun 07:30

Trade Balance : May 08:30 USD-43.7bn USD-43.7bn USD-44.2bn

FOMC Minutes 14:00

Wednesday

Import Prices m/m : Jun 08:30 0.2% -0.7% -0.7%

Import Prices Ex-Petroleum m/m : Jun 08:30 0.4% 0.2% n/a

EIA Oil Inventories 10:30

Treasury Statement : Jun 14:00 USD-57.6bn

Thursday

PPI (sa) m/m : Jun 08:30 0.2% -0.1% -0.2%

PPI (sa) y/y : Jun 08:30 7.0% 7.3% 7.4%

PPI Core (sa) m/m : Jun 08:30 0.2% 0.2% 0.2%

PPI Core (sa) y/y : Jun 08:30 2.1% 2.2% 2.1%Retail Sales m/m : Jun 08:30 -0.2% -0.7% 0.1%

Retail Sales Ex-Autos m/m : Jun 08:30 0.3% -0.8% 0.4%

Initial Claims 08:30 418k 435k n/a

Business Inventories : May 10:00 0.8% 0.4% 0.8%

Friday

CPI m/m : Jun 08:30 0.2% -0.1% -0.1%

CPI y/y : Jun 08:30 3.6% 3.5% 3.7%

Core CPI m/m : Jun 08:30 0.3% 0.2% 0.2%

Core CPI y/y : Jun 08:30 1.5% 1.6% 1.6%

Empire State Survey : Jul 08:30 -7.8 1.0 4.1

Industrial Production m/m : Jun 09:15 0.1% 0.3% 0.4%

Capacity Utilisation Rate : Jun 09:15 76.7% 76.8% 77.0%

Michigan Sentiment (Prel) : Jul 09:55 71.5 72.5 72.5

Events and Speeches Time Place Subject

Day

Wednesday

Fed’s Eric Rosengren 09:10 Worcester, MA Speaks on Economic Outlook at Fed Conference

Thursday

Fed’s Ben S. Bernanke 10:00 Washington, DC Delivers Monetary Policy Report to House

Fed’s Richard Fisher 13:20 Dallas, TX “Economic Overview: What’s Next?”Friday

Fed’s Ben S. Bernanke 10:00 Washington, DC Delivers Monetary Policy Report to Senate





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Market Economics Team

Paul Mortimer-Lee Global Head of Market Economics 44 20 7595 8551 Gizem Kara Scandinavia 44 20 7595 8783

Ken Wattret Chief Eurozone Market Economist,Germany

44 20 7595 8657 Dominique Barbet Eurozone, France 33 1 4298 1567

Luigi Speranza Head of Inflation EconomicsEurozone, Italy

44 20 7595 8322 Julia Coronado Chief Economist North America 1 212 841 2281

Eoin O’Callaghan Inflation, Switzerland, Ireland 44 20 7595 8226 Yelena Shulyatyeva US 1 212 841 2258

Bricklin Dwyer US, Canada 1 212 471 7996

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Ekonomika v USA