Viewpoint: The US economy in 2012 is caught in a kind of pre-election limbo.

For professional investors and advisers only

The opening months of 2012 saw positive indications come from economic variables in the United States: confidence surveys, production, consumption, employment, and real estate market all seem to be showing a recovery compared to the early autumn. GDP growth in Q4 2012 was 3% q/q annualised, and the rate may still be revised upwards. The markets celebrated the acceleration of the recovery. Despite encouraging macroeconomic signals, we are not revising upwards our growth estimates for this year. What’s more, in Q1 GDP growth should slow considerably compared to the end of 2011, to close to 1.6% q/q ann. Uncertainties are still weighing on the scenario for 2012 and, even more so, for 2013. The main downside risks are higher oil prices, and state and federal fiscal consolidation.

We continue to forecast moderate growth in 2012 (2.3%), with a mixed quarterly path: the opening months of the year should bring a slowdown compared to the end of 2011, inflated by a 1.9 pp contribution of inventories, and by the expiration of investment incentives, the effects of gasoline price increase on consumption will become more evident in Q2. No particular drags on the economy are expected in Q3 2012, at least for now. In Q4 2012, on the other hand, the first effects of the forthcoming fiscal consolidation could start to be felt, and political clashes could materialise over the federal debt ceiling.

The effect of oil price increases will be stronger on growth than on inflation. The Department of Energy has raised its estimate of energy prices for 2012, placing the forecast WTI price at 106 USD in 2012 (+ 5 USD vs. the February estimate) and gasoline at 3.79 USD/gallon, from 3.53 in 2011. Based on Oxford Economic Forecasting estimates, a 5% increase in the price of oil results after one year in a rise in core inflation of 0.1 pp, and a 0.14 pp subtraction from GDP growth. On a quarterly basis, most of the drag should materialise between the end of Q1 and the end of Q2, in the form of a slowdown in consumption. Spending on gasoline and other fuels accounts for 2.5% of total spending in real terms. The price of gasoline increased by 7.2% between December and February. Real consumption growth in January, of 1.5% y/y, was cooled by a fuel effect of 0.35pp: this effect is set to increase considerably in the months ahead, weighing on overall consumption growth. Also, the trend of real disposable incombe has been stuck at 0.7% y/y since mid-2011, and does not allow us to expect resilient exgasoline spending levels.

As regards fiscal policy, the overall stance is becoming more restrictive. At state level, fiscal restriction remains substantial, despite the cyclical improvement and the resulting increase in tax revenues. The drying up of Federal transfers implies corrections at the state level of 100 billion dollars in fiscal year 2012, and 47 billion in 2013, according to the Center for Budget Policy Priorities. The crucial point, however, lies with the federal budget: until Q3, the country will be caught in a pre-election limbo, with no decision-making power (and, what’s more, without an approved Budget for fiscal year 2012, which started on Oct. 1st). In Q4 a new clash could take place over the Federal debt ceiling, involving Congress and the President. Even more importantly, at the end of December tax cuts worth around 400 billion dollars will expire, new taxes worth 20 billion will come into force. As of Oct 1st 109.4 billion dollars in “automatic” spending cuts will start: 54.7 billion on the Defence budget, 38.6 billion on other discretionary spending, and 16.1 billion on mandatory programmes. The total expected restriction totals app. 530 billion dollars (3.3% of 2013 GDP). Congress will take office on January 3rd, the President a few weeks later: will they be able to stop such an avalanche of measures set to come into force by 1st January?

Appendix

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