Reindustrialization in USA - Euler Hermes

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Euler HermesEconomic Outlook n° 1187 | Special Report | The Reindustrialization of the United StatesIt is the (macro)economy, stupid!With the deceleration of the global economyand prolonged limbo of the euro zone, the U.S.economy appears to be particularly central toglobal recovery. However, domestically, severalsteps need to be taken to limit the damage of thefiscal situation, curb unemployment figures, andbenefit fully from the aggressive monetary policystance chosen by the Fed. It will also be necessary tocontinue to unleash growth drivers: consumption,private sector investments, and exports to offset thegradual withdrawal of the post-crisis governmentspending, without causing damage. Is this feasible?We argue that there are some green shoots whichcould lead to a favorable macroeconomic backdrop,against which what we call the “Reindustrializationof the U.S.” is possible.A. Macroeconomic Forecasts for the U.S.U.S.A. share 2011 2012 2013 2014GDP 100% 1.8 2.2 1.9 2.5Consumer Spending 71% 2.5 2.0 2.2 2.6Public Spending 19% -3.1 -1.9 -1.4 -1.3Investment 13% 6.6 7.8 3.9 7.2Construction 2% -1.4 11.6 9.5 10,3Equipment 10% 8.6 6.9 2.4 6.5Stocks* 0% -0.2 0.1 0.1 0,0Exports 13% 6.7 3.6 4.3 6.5Imports 16% 4.8 2.8 3.5 6.5Net exports * ‐3% 0.1 0.0 -0.0 -0.2Current account ** ‐466 -508 -495 -477Current account (% of GDP) -3.1 -3.2 -3.0 -2.8Employment 0.6 1.7 1.1 1.5Unemployment rate 8.9 8.1 7.7 7.1Wages 2.0 1.5 1.9 2.2Inflation 3.3 2.2 2.0 2.1General government balance ** -1250 -1129 -1039 -981General government balance (% of GDP) -8.3 -7.2 -6.4 -5.8Public debt (% of GDP) 101.0 104.8 108.1 110.1Nominal GDP ** 15 076 15 684 16 230 16 909Change over the period, unless otherwise indicated: * contribution to GDP growth ** U.S.D billionsSource : IHS Global Insight, Euler Hermes6
Economic Outlook n° 1187 | Special Report | The Reindustrialization of the United StatesEuler HermesFalling over the ‘fiscal cliff’:why the short-term outlook is worryingThe U.S. economy still faces significantheadwinds resulting in expectationsof sub-par GDP growth and elevatedunemployment for 2013. The FederalReserve has started another roundof quantitative easing (QE3) to helpstimulate the housing market and thebroader economy. However, QE3 islikely to have a very limited effect anduncertainty surrounding the fiscalsituation is likely to contribute to theweakness.u Recent DevelopmentsThe U.S. economy lost 9 million jobs in the recessionand as of August 2012, more than three years since therecession ended, it has only recovered about half thatamount. The unemployment rate, despite a recentdecline, has remained above 8% for three and one halfyears and the labor participation rate is the lowest ithas been in 30 years. GDP has been correspondinglyweak, growing only 2.1% over the past four quarters.Manufacturing, which helped lead the economy outof recession, has been stumbling for several months,and while consumers have enjoyed some recentgains in income, consumption still remains weak.Positives have included surprisingly strong auto sales,a firming housing market, and falling insolvencies.u Mixed perspectives for 2013Looming events will make for yet another year ofsub-par GDP growth in 2013 - around 2% - withunemployment most likely remaining near 8%. Theuncertainty of the fiscal situation at the beginning of2013 is weighing on the economy. Even if a plan isdevised to reduce the country’s debt, it will probablynot have much effect until the middle of 2013 at theearliest. Fiscal Contraction could push the economyinto recession. However, the most likely scenario isthat most of the fiscal contraction will be avoided sinceboth Republicans and Democrats believe that such arapid fiscal withdrawal would be politically dangerousand a serious blow to the economy. Yet uncertaintyremains as the fiscal situation issues may not beaddressed entirely by the new session of Congress.On the monetary side, while QE3 is intended to boostthe housing sector by lowering mortgage rates, theplan is unlikely to help much since mortgage ratesare already near historical lows. Risk-averse bankershave slowed the mortgage market, not high interestrates. Nonetheless, there has been some firming inseveral housing market measures such as prices andunit sales, but it is premature to call a bottom. On anupbeat note, insolvencies are expected to fall 8% in2013 due to positive, albeit weak GDP growth.• • •Estimating the impact of the fiscal situationu What: A combination of higher taxes and reducedspending at the start of 2013.u How much: Fiscal tightening would amount to a good4% of GDP in 2013 (5% of GDP, if changes in revenues andspending unlinked to specific policies are included). Ifthe automatic spending cuts (across-the-board spendingcuts) under the Budget Control Act are avoided,fiscal tightening would be reduced to between 1.8% ofGDP and 2.7% of GDP, respectively. Applying an overallfiscal multiplier of 0.75, the drag on GDP growth wouldamount to between 1.4% and 2%, respectively.u To put 2013 fiscal tightening into perspective: Generalgovernment net borrowing amounted to 8.7% of GDP inH1 2012, down from 10.25% of GDP in 2011.7
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Reindustrialization in USA - Euler Hermes

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