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US Economy: muddling throughTUESDAY

10 JANUARY 2012

•  We estimate that real GDP grew at a 3.5% annualized rate in the fourth quarter; a tadhigher than our view in the latest Nordic Outlook. Moreover, the economy clearly hasmomentum and the fiscal headwind is actually less severe than previously forecasted,at least in the very short term. But while the U.S. economy gives off the allure of acountry that has decoupled, we are concerned about the tightening in financial

conditions as well as the lagged effects from the recession in Europe. That being said,our forecast is that the U.S. economy is winning the beauty price in the ugly contest.We forecast 2.3 per cent and 2.2 per cent GDP growth in 2012 and 2013,

respectively. •  Core inflation is peaking and should start to decline this year. The last couple of

readings have been muted and according to our forecast core inflation will fall to1.2 per cent by the end of 2012.

•  The December labor market report was strong, and the unemployment rate managedagain to drift lower, to 8.5 per cent from 8.7 per cent in November. A year ago, theunemployment rate was sitting at 9.4 per cent. The rapidly declining jobless rate has

surprised us; the drop is much bigger than suggested by the Okun relationship. A fly-in-the-ointment is that decline in the labor force has helped pull the unemploymentrate lower. Since GDP is growing at around the potential rate in 2012-13, we expectthe unemployment rate to hold steady at its current level.

•  The Fed will start publishing forecasts for the fed funds rate after the January 24-25FOMC meeting. Not only that, but there will be a text as well describing “the key

factors underlying those assessments as well as qualitative information regardingparticipants expectations for the Federal reserve’s balance sheet”. We expect the textto reveal that several FOMC participants look for the balance sheet to increasein 2012, thus affecting market expectations. Our forecast is for another round ofasset purchases (QE3) this summer.

Mattias Bruér, +46 8 763 85 06 

Growth

Inflation

Labour-market

Key dataPercentage change

2010 2011 2012 2013

GDP* 3.0 1.8 2.3 2.2

Unemployment** 9.6 9.0 8.4 8.4

Inflation* 1.7 3.2 1.7 1.3

Government deficit*** -10.3 -9.2 -8.4 -7.5

Fiscal tightening**** -0.3 0.6 1.2 1.3

* Percentage change, ** Per cent of labour force, *** Per cent of GDP

**** Change in structural balance as a percentage of GDP

Source: SEB

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Economic Insight

GDP AND ACTIVITY INDICATORS

•  U.S. economic data has surprised to the upside, and we have bumped up our Q4 real GDP forecast to 3.5 per cent.Inventories provided a sizable boost in Q4; underlying growth (final sales) was around 2 per cent. But there is astrong near-term momentum, and the H1 GDP forecast was too pessimistic in the November Nordic Outlook. Weexpect real GDP growth slightly above 2 per cent both this year and the next. The recession in Europe is

preventing a classic bungee-jump recovery.

•  Our Financial Conditions Index is on a rising trend, although the tightening today is nowhere near that afterLehman. Our Credit Constraint Index is rising too, but current index levels are still consistent with ongoing,albeit low, growth.

•  In the eleventh hour Congress extended the payroll tax cut and the unemployment insurance, but only for a coupleof months. Our forecast assumes that legislators ultimately extend the stimulus measures for the entireyear, but it is likely going to be a messy process. Fiscal austerity still is a headwind both this year and the next.

Meanwhile the Fed is taking actions to support the recovery and we look for another round of large-scale assetpurchases later this year.

•  We have collected a variety of macro indicators in the two charts on the bottom of the page. The first chart takesoff in June 2011, whereas the second chart takes off in September. Compared to six months ago, the housing-related indicators have risen firmly. It is noteworthy, however, that consumer expectations are lower today than six

months ago. Compared to three months ago the consumer has emerged from the dead, presumably reflectingboth the better jobs market and lower gasoline prices. But the improvement is broad-based; only industrial

production and ISM services have basically flat-lined since September.

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Economic Insight

CONSUMER SPENDING AND THE LABOR MARKET

•  The trend in real consumer spending is pointing slightly downwards, and our indicator model suggests no pick up in

the near term. Real disposable income actually is deflating, which means that a major pick up in consumer

spending looks unlikely. In year-on-year terms, real average earnings (both on an hourly and a weekly basis) are

deep into negative territory.

•  Arguably the key is the labor market; our hunch is that the current unemployment level will limit wage growth. From

July to November, the U.S. economy managed to generate 653k new jobs on net, and yet real personal disposable

income fell in four of those five months and at a 1 percent annual rate. However the large drop in initial claims 

indicates that the labor market improvement will continue, unless, of course Europe’s problems get in the way.

•  Households are still focused on reducing their debt levels rather than increase borrowing. But the fact that the

household debt service ratio has dropped to its lowest level in 15 years is telling us that ongoing deleveraging will

not be the last straw that breaks the camels back.

•  The 60 cent drop in gasoline prices since last summer supported consumption, as did the drop in the savings

rate from 5 per cent to 3.5 per cent while household net worth, if anything, is suggesting that savings should rise.

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Economic Insight

INFLATION INDICATORS

•  Reflecting the drumbeat of positive U.S. economic news, the dollar index has risen to its highest level in 16months. The stronger dollar may eventually put pressure on the trade and current account deficits. Thecurrent account deficit has been moving sideways over the last two years. Meanwhile the growing economy

in combination with a touch of fiscal austerity has pushed the budget deficit in right direction.

•  Core CPI inflation was 2.2 percent in November in year-on-year terms. Several factors, such as higher demandfor rental housing units and the supply-chain constraints in the auto industry may have contributed to the rise.

Core CPI inflation is close to its peak, and our forecast is that it will fall back to 1.2 per cent by the end of2012. The market expects lower inflation too; breakeven inflation rates are muted.

•  The output gap is shrinking, but it is still huge in a historical perspective.

  p  e  r  c  e  n   t  a  g  e 

  c   h  a  n  g  e

 

(Constant Maturity Inflation Indexed bonds)

Breakeven inflation

10Y 5YSource: Reuters EcoWin, SEB

03 04 05 06 07 08 09 10 11 12

-3

-2

-1

0

1

2

3

-3

-2

-1

0

1

2

3

 

Headline less core inflation

A proxy of the food/energy shock

US Euro zoneSource: Reuters EcoWin, SEB

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

-4

-3

-2

-1

0

1

2

3

4

-4

-3

-2

-1

0

1

2

3

4