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US: Recovery Turning into Expansion • In the first three quarters of the present economic recovery, real GDP grew at an annualised pace of 3.7%. Chart 1: Aggregate Hours Worked • The drivers of economic growth are gradually rotating away from temporary adjustments in inventory management and fiscal stimulus toward more sustainable growth in investment and consumption. • Consequently, we are revising up our GDP growth forecast to 3.2% y/y in 2010 from our previous 2.9% estimate. • The risks of a double-dip recession, or a significant slowdown in the recovery, are fading. • Structural adjustments in a few sectors still point to a gradual acceleration in final demand. However, commercial real estate and state and local government spending will weigh on growth. Source: Reuters EcoWin Pro, BNP Paribas Chart 2: NF Productivity and ULCs The recovery increasingly looks sustainable After three quarters of economic growth, the economy has grown at an annualised rate of 3.7%. As the nascent recovery has progressed, more sectors have begun to contribute to growth adding confidence to its sustainability. It is now becoming more evident that the cyclical recovery is turning into an enduring economic expansion. And, the recovery is now generating enough broad momentum to squash fears that another sharp downturn will occur. Business inventory building will diminish as a support to growth… On average, the upswing in the inventory cycle has contributed about 2.0pp to GDP growth in the recovery thus far while final sales growth has averaged a below potential pace of 1.6%. Business investment in inventories is projected to increase at a much slower pace over the next three quarters and to contribute an average of 0.3pp to estimated GDP growth. …however, a gradual increase in job growth should cause domestic demand to pick up the slack Perhaps the most important factor contributing to the increased confidence in the sustainability of the recovery is the beginning of private sector job growth. Thus far, most of the growth in the input of labour has come from an increase in hours worked Source: Reuters EcoWin Pro and in temporary workers hired. Aggregate hours worked rose 1.8% in Q1 saar after two years of sizable declines. Moreover, over the past six months, private businesses have hired 313k temporary workers. Hiring of temporary workers tends to lead to permanent hiring with a lag of several quarters. The census hiring will supplement employment growth The rise in private employment will be supplemented in the near term by federal government hiring for the 2010 decennial census. These temporary part-time federal workers will add 700k to payroll growth through May and raise income and spending over the next two quarters. By the end of October their work will be finished and they will be laid off. Consumption growth set to remain solid even as the fiscal stimulus fades Growth in consumer spending is forecast to average 2.9% over the next three quarters, just above its Brian Fabbri 7 May 2010 Market Mover 22 www.GlobalMarkets.bnpparibas.com
quarterly average of 2.7% in the first three quarters of the recovery. Early growth in consumer spending was supported by a boost to purchasing power from falling energy prices and the sizable federal stimulus. With hours worked beginning to rise, we expect consumers to continue to spend at a solid, if not spectacular, pace. The business recovery has been impressive The positive side of the savage correction in the labour market is that non-farm productivity surged at a very healthy pace of 7.4% saar during the first three quarters of the recovery. Such rapid growth in productivity contributed to a plunge in labour costs and spectacular profit growth. Business investment in IT and related equipment grew at an annualised rate of 11.1% in the first three quarters of the recovery. Given the enormous pile of free cash businesses have generated, they are expected to continue investing in productivity-enhancing IT at a robust pace. We forecast that growth in business investment in equipment will accelerate slightly to an annualised rate of 12.3% in the next three quarters. Housing expected to grow at a modest pace Residential investment is expected to regain some of its lost momentum in the next several quarters. Residential investment slumped in Q4 2009 and Q1 2010 partly due to adverse winter weather and partly due to the aftermath of the initial homebuyers’ tax credit expiry in November which brought forward some home buying. The final expiry of this credit in April is causing another surge in sales and therefore home building in Q2. Residential investment is therefore forecast to surge by 15% in Q2 and then decelerate in Q3 on a similar, but less dramatic, pull forward of home buying. Thereafter, residential investment is forecast to continue supporting growth as housing rebounds at a gradual pace held back by tight credit conditions and uncertainty about house prices. Some sectors will continue to be a drag on growth However, not all sectors of the economy are expected to expand in coming quarters. Business investment in commercial real estate will continue to shrink at a very sharp pace. The woeful dynamics of that industry – declining rent, rising vacancies and falling prices – indicate that building plans will continue to diminish until the economy catches up with the leveraged over-building that occurred at the end of the last expansion. Consequently, we estimate that business investment in commercial construction will subtract about 0.5pp from overall GDP growth. Chart 3: Consumption’s Contribution to GDP Growth Source: Reuters EcoWin Pro, BNP Paribas Chart 4: Inventories’ Contribution to GDP Growth Source: Reuters EcoWin Pro, BNP Paribas Chart 5: State and Local Governments are in Fiscal Trouble Source: Reuters EcoWin Pro, BNP Paribas State and local governments still in fiscal trouble Another sector that will weigh on overall GDP growth in the next several quarters is spending by state and local governments. Nationwide state and local budget deficits are forecast to increase rather than Brian Fabbri 7 May 2010 Market Mover 23 www.GlobalMarkets.bnpparibas.com
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Page 3 and 4: UK: all eyes on the election US: re
Page 5 and 6: Event response The ECB is being ove
Page 7 and 8: Eurozone Periphery: Compare and Con
Page 9 and 10: over 20% in Q1) and, last but not l
Page 11 and 12: Market Stress Charts • Signs of s
Page 13 and 14: Chart 7: Greek Bank CDS* 900 Greece
Page 15 and 16: • The plan also contains a number
Page 17 and 18: Germany: Downs and Ups • The impa
Page 19 and 20: Retail sales data from month to mon
Page 21: On inflation, the statement was als
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Page 27 and 28: Japan: Rising Chance of Sales Tax H
Page 29 and 30: BNP Paribas Surprise Indicator •
Page 31 and 32: UK headline After surprising to the
Page 33 and 34: US: Supply Could Affect Swap Spread
Page 35 and 36: steep curve is typically associated
Page 37 and 38: decline. We continue to maintain ou
Page 39 and 40: Chart 12: 90-119 Day Dlq for FRE 90
Page 41 and 42: the gamma sector for some time now.
Page 43 and 44: EUR: Limited Nervousness at ECB Ten
Page 45 and 46: with the big redemption (EUR 17.7bn
Page 47 and 48: measures are not promptly taken to
Page 49 and 50: Table 1: BNP Paribas' Inflation For
Page 51 and 52: Table 3: BNP Paribas' Inflation For
Page 53 and 54: Table 1: BNP Paribas Carry Analysis
Page 55 and 56: What’s the call? It is relatively
Page 57 and 58: Update on FIN SEN and FIN SUB 5/10y
Page 59 and 60: Germany 10y: Within MT falling wedg
Page 61 and 62: Judging Currencies by Liquidity •
Page 63 and 64: type of regulation would reduce mon
Page 65 and 66: Euro Dives • The euro is collapsi
Page 67 and 68: Currency Spot Trade Recommendations
Page 69 and 70: Economic Calendar: 7 - 14 May (cont
Page 71 and 72: Key Data Preview Chart 1: US Payrol
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Key Data Preview Chart 5: UK Manufa
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Key Data Preview Chart 9: French GD
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Key Data Preview Chart 13: US Indus
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Treasury and SAS Issuance Calendar
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Central Bank Watch Interest Rate EU
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FX Forecasts* USD Bloc Q2 '10 Q3 '1
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RESEARCH DISCLAIMERS: IMPORTANT DIS
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