• US economy out of recession after 3.5% quarter-on-quarter annualised growth in 3Q 09
• NBER yet to confirm recession’s end, but is often slow with their assessment of the economic cycle
• Consumption boosted by cash-for-clunkers
• Residential investment possibly boosted by housing credit
• Inventories will add to GDP over the next few quarters
• Misleading to talk about the recovery solely based on stimulus; approximately 23% of stimulus money spent to date
• Positive 3Q 09 GDP paves the way for further improvements going forward
• Corporate earnings have already surprised on the upside
• Low cost base could lead to an explosion of profitability for US companies once demand returns

According to data from the Bureau of Economic Analysis, the US economy emerged from recession with annualised growth of 3.5% quarter-on-quarter in 3Q 09. This ended four consecutive quarters of contraction, technically ending the recession in the world’s largest economy.

While the recession has technically ended (by the expansion in GDP), the National Bureau of Economic Research (NBER) has not yet confirmed the end of the slowdown. Other than GDP data, the NBER looks at various other indicators of an economy’s health, like employment and personal income. However, investors must be cautioned that the work of the NBER is backward looking: the recent slowdown in the US economy was only confirmed as a recession in December 2008, while the peak of economic activity from which the downturn began was backdated to December 2007. Using this as a precedent, it is possible that the NBER may only confirm the end of the recession by the middle of next year. Thus, investors who are seeking confirmation from the NBER for the end of the recession may have a long wait ahead.

Consumption helped by cash-for-clunkers

We had previously forecasted muted consumption growth in 3Q 09, given that consumer sentiment has been slow in responding to improving economic data and asset prices. The 3.4% quarter-on-quarter annualised growth in consumption blew our estimates out of the water, and was by far the largest contributor to growth, making up 2.36% of the 3.5% overall growth figure. Much of this gain in personal consumption expenditures can be attributed to the cash-for-clunkers scheme which was implemented in the third quarter, which resulted in a 22.3% annualised increase in durable goods from 2Q 09. Excluding motor vehicle output, GDP growth would have been 1.88%.

Residential investment boosts investment

A 23.4% quarter-on-quarter annualised gain in residential investment added 0.53% to overall growth, compared to the 0.67% deduction from 2Q 09’s GDP figure. The spike in residential demand in 3Q 09 has been largely credited to the implementation of a housing credit for first time homebuyers. The scheme ends on 30 November 2009, which (in the opinion of many market watchers) will result in a heightened level of residential demand in the near term.

Inventories decline, but less that in 2Q 09

In a prior report, we stated that the level of inventories could be crucial to determining the final GDP figure for 3Q 09. Inventories had declined for five consecutive quarters before the latest quarterly report, with three consecutive quarters of increasing decline. 3Q 09 saw inventory levels being drawn down further at an annual rate of US$130.8 billion (in 2005 dollar terms), compared to a US$160.2 billion decline in 2Q 09. However, the lesser extent of decline of inventory contributed to a 0.94% boost to overall GDP.

Inventory restocking appears to be taking longer than expected, but part of 3Q 09’s decline in private inventories could have been a result of increased automobile sales in the quarter. What this entails for subsequent quarters is an increased contribution to GDP from the private inventory component, while imports (which subtract from GDP) will likely increase as inventory is being rebuilt.

Growth on stimulus?

The 3.5% growth figure was higher than the consensus forecast of 3.3%, but a key criticism of the latest economic growth figure is that it was largely fuelled by Government stimulus, rather than improvements in the underlying economy. The two key schemes, namely the “cash-for-clunkers” and US$8,000 housing credit scheme did have a positive impact on the relevant segments of GDP. However, we prefer not to attribute the improvements entirely to stimulus.

ProPublica, an investigative journalism news network, tracks the amount of US stimulus spent to date. As at 30 October 2009, the figure stands at about US$183 billion, or about 23% of the US$782 billion authorised by US Congress. Of the US$213 billion allocated to tax cuts and credits, only US$63 billion has been spent. The amount of stimulus spent to date amounts to just over 1% of the entire US economy (approximately US$14 trillion), a minute amount by any measure. It is also difficult to accurately estimate the number of homebuyers who would not have made the purchase had the housing credit scheme not been in place.

Positive GDP result sets the way for further subsequent improvements

The latest 3Q 09 advance GDP report has certainly surprised on the upside in terms of consumption, which has been partially boosted by government incentives. On a positive note, the consumption of services (the major component of personal consumption spending) rose an annualised 1.2% quarter-on-quarter, suggesting that the US consumer is showing some signs of life, barring spending on automobiles.

Consumer sentiment remains weak, given the problems in the labour market, but we re-iterate our view that unemployment will be a lagging indicator in this recovery as employers are slow to rehire. 3Q 09 corporate earnings have reflected some of the improvements in the economy, with almost 80% of S&P 500 companies having reported better-than-expected earnings (as at 27 October 2009). While much of this may still be attributed to cost-cutting and lowered overheads, the low cost base for these companies means that once demand returns, profits have the potential to expand very rapidly, fuelling huge levels of earnings growth.   

Recommended US funds:

Aberdeen American Opportunities Fund 
FLF Opportunities USA Fund

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