Chart 1

Chart 2

Chart 3

Key Points

• GDP grew 5.7% q-o-q (annualised) in 4Q 09, ahead of the 4.8% expected by the consensus
• For 2009, this represents a 2.4% y-o-y contraction
• Huge boost by inventories, but consumption also  better-than-expected
• Equipment and software investment up 13.3% q-o-q annualised; capital spending rebounding
• US Leading Indicators still strong, a sign of better things to come
• Lack of negative economic data coupled with attractive valuations suggest recent market correction is just a temporary pullback

According to recently released advance estimates from the National Bureau of Economic Analysis, US GDP grew by a larger-than-expected 5.7% on an annualised quarter-on-quarter basis, versus the 4.8% growth expected by the consensus (see Table 1). There was no revision to the 3Q 09 GDP growth of 2.2%, which had earlier been revised down from the original 3.5% figure in the advance estimate (see US economy posts 3.5% growth in 3Q 09, recession ends ). The US economy has now reported two straight quarters of growth, after four consecutive quarters of contraction. On a yearly basis, the US economy shrank 2.4% in 2009, after posting 0.4% growth in 2008.

4Q 09’s figures boosted by inventories

We had previously highlighted the importance of an inventory cycle rebound to US GDP, and 4Q 09’s results have been a testament to this as inventories alone contributed a massive 3.39% of the overall 5.7% growth. We note that inventories continued to decrease in 4Q 09, an eighth straight quarter of decline. However, the US$33.5 billion decline in inventories for the last quarter of 2009 was less than the US$139.2 billion decline in 3Q 09 (in annualised 2005 dollar terms), resulting in a huge net positive contribution to GDP from this segment despite the continued drawdown.

In our forecast for 2010 (see US: 2010 growth at 3.7%), we suggested that inventories alone will add about 1.4% to full-year growth and recent data suggests that our forecasts are on track. Inventories certainly appear to be turning the corner, with US Manufacturing & Trade inventories rising by 0.4% month-on-month in both October and November 2009, after thirteen consecutive months of decline. 

But consumption also better-than-expected

Personal consumption expenditures (PCE) increased 2% on an annualised quarterly basis, marginally higher than the consensus forecast of a 1.8% increase and suggesting that US consumption may not be totally in the doldrums. Despite the high base of the cash-for-clunkers incentive in 3Q 09, a deeply troubled housing market as well as a 10% unemployment rate, personal consumption still managed to post credible growth. With US consumers continuing to deleverage (outstanding consumer credit contracted for a record tenth consecutive month in November 2009), conditions remain difficult and our own expectations for PCE in 2010 are rather muted given the many difficulties surrounding the average US consumer. We expect consumption to contribute a paltry 0.8% to full-year 2010 growth.

Capital spending reviving, a key driver for 2010

Our 3.7% growth forecast for 2010 is based on an expected revival in capital spending by US businesses. 4Q 09’s results have emphasised this trend, with equipment and software spending gaining an annualised 13.3% quarter-on-quarter, adding 0.81% to quarterly growth. Structures lagged the decline in equipment and software spending in 2008 (see Chart 1) and the segment continued to contract in 4Q 09, even as residential and equipment and software investments rebounded. However, structures are less than half the size of equipment and software investments (US$364.6 billion versus US$907.7 billion, in 2005 dollars based on annualised 4Q 09 figures), and we expect companies to continue to increase capital spending in 2010, driving gross domestic investment and GDP growth.

Leading indicators continue to move skywards, outlook remains positive

The Conference Board US Leading index continued to rebound strongly in December 2009, suggesting a positive outlook for the next two quarters (see Chart 2). The index of US leading indicators made a low in March 2009, before embarking on a “V-shaped” rebound in the subsequent months. Leading indicators have now posted nine consecutive months of ascent (on a month-on-month basis), which strongly suggests that the US exited recession somewhere in the middle of 2009 (the National Bureau of Economic Research is due to confirm this).

More recently, the January 2010 ISM Manufacturing PMI registered 58.4, the highest level since August 2004 and indicative of a strong expansion in the manufacturing sector (see Chart 3). As at 2 February 2010, the consensus now expects 2.7% growth, insignificantly higher from the 2.6% as at our previous update at the end of December 2009. Various leading indicators are suggesting a strong recovery in output, which means that the future may not be as bleak as what certain economists are suggesting. We suspect that 2010 growth will be much stronger than what the current consensus currently predicts, and closer to our 3.7% growth forecast.  

Recent correction a temporary pullback; represents an attractive opportunity

The benchmark S&P 500 fell 6.6% from its recent peak to 1073.87 points on 29 January 2010, amidst uncertainty over Obama’s plans to reform the financial sector. With China’s tightening activity the only worrisome and noteworthy economic data (we believe it will lead to more sustainable growth in the long term and should be seen in a positive light), the market has ignored the many positive earnings surprises for companies reporting for 4Q 09. Despite the majority of companies continuing to post positive surprises (76.9%, as at 1 February 2010), investors have adopted a “sell-the-news” attitude which has contributed to a pullback in the stock market.

A fall in the stock market coupled with the lack of any adverse news suggests a period of temporary consolidation in the market, which many have argued is long overdue . Economic fundamentals continue to improve, and valuations (see Table 2) remain attractive on a forward-looking basis. This allows us greater confidence in assessing the recent pullback as a temporary one (and not the beginning of another major downturn), and we maintain that investors who are underexposed to equities may wish to use this pullback to increase their equity exposure. Earnings and the economy have only just begun to recover, and it probably too early to exit US equities at this juncture. We maintain a 4.0 star “very attractive” rating on the US market.  

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