United States: Risk Assessment
Country Rating1
Rating: A2
Business Climate Rating1
Rating: A1
Risk Assessment2
Economic growth was disappointing in the first 2011 half
Supported by very reactive fiscal and monetary policies in 2010, economic growth is expected to come to about 2.9%, driven by household consumption, restocking, and capital investments. But the deep-rooted trends that persisted throughout 2010 continued in the first half this year. Economic growth slumped in the first and second quarters (up respectively just 0.4% and 0.2% quarter-on-quarter), which prompted a downward revision of annual growth in 2011 from 2.2% to 1.7%.
Decline in household and corporate confidence
Growth in the first 2011 half was underpinned by the $900-billion agreement concluded late in the year between the Republican Party and the Obama administration. This stimulus package, intended for households and companies alike, supplements the Federal Reserve's unconventional monetary easing measures (QE2) came to an end this past 30 June. The combined effect of the macroeconomic data released since September, the face-off by Republicans and Democrats this summer over the need to raise the federal debt ceiling, and the downgrading of the country's triple-A credit rating by Standard & Poor's have driven household and corporate confidence to their lowest point since 2009. Several factors continue to affect economic activity: completion of the restocking process, still gloomy employment outlook, depressed property market, debt repayment by American households (with the balance outstanding declining from over 131% of disposable income in 2008 to 114% in 2011), and maintaining their saving level (around 5% of disposable income). Households are likely to remain cautious on spending as long as the measures intended to consolidate public-sector finances have not been spelled out. In this context, residential investment is remaining sluggish with the stock of homes slightly decreasing from 7.5 months in January to 6.6 months in August, but likely to jump back with the resumption of foreclosures by banks. The situation will continue to undermine prices, which have contracted by 20 per cent on the average since the first quarter of 2007 and could decline by 5%-10% this year. And this trend limits the geographic flexibility of workers with the balance due on their mortgage loans remaining higher than the value of the underlying property. Strengthened by increased profits and by tax credits, companies will continue to invest in capital assets arrears due prudence as long as demand has not really come back to life. Job creation remains low and unemployment high at over 9%. Exports, meanwhile, will still benefit from favourable dollar exchange-rates, even if the currency may appreciate once again due to its role as a safe haven. Sales abroad could also derive support from Asian demand (20% of sales), which would offset expected slowdown in demand from advanced countries, which constitute a majority of the US export market. Foreign trade will continue meanwhile to make a limited but steady contribution to economic growth.
On 21 September, the Federal Reserve Bank announced $400-billion in new monetary policy measures effective through June 2012. By selling from short-term holdings treasury bills with residual maturities between three months and three years and buying long-term paper with maturities between six and thirty years the central bank seeks to lower the yield curve and thereby make returns on long-term investments less attractive with the ultimate purpose of inducing households and companies to spend more now. The announcement also included a series of support measures for the property sector.
The Obama administration meanwhile has proposed a vast, $447-bllion jobs programme for 2012 intended to increase household purchasing power (renewal of the extension of unemployment benefits to 99 weeks, reduction of payroll taxes) and spur job creation (reduction in employer payroll costs, funding of infrastructure projects). With the ideological debate over the reduction of public debt still going full throttle between the two diametrically opposed camps, the chances of Congress adopting the entire jobs programme appear decidedly slim.
Smaller companies weakened by the strong exposure of regional banks to the property market
According to the Federal Reserve, large US companies generated $2 trillion in cash flow last year, a record unequalled in the past three decades. But this surge is attributable more to the drop in unit costs and the slowdown in investment than to increased turnover. And the situation is entirely different for smaller companies. Weakened by the slowdown in sales, they have limited access to bank credit, which failed to revive due not only to a lack of demand but also to the weakened financial health of many regional banks, which are the main financial partners of smaller American companies. Corporate bankruptcies decreased significantly by 15.3 per cent in the first quarter 2011, compared to the same 2010 period, but the bankruptcy rate remains high, twice the pre-crisis level. According to Coface monitoring records, corporate payment behaviour has been well orientated in the United States since the recovery of the economy.
Strengths
- Very reactive fiscal policy
- Labor market flexibility
- Predominant role of the US dollar in the global economy
- Quality of higher education and R&D
- Full employment is an explicit Federal Reserve objective
- On third of corporate profits companies come from abroad
- Corporate cash flow is at an historic high
- Dynamic demographics
Weaknesses
- Economy very dependent on financial and property asset prices
- Important household consumption contribution to GDP (70%)
- High public deficit and federal debt
- Antiquated state of a high proportion of infrastructure
- Reforms more difficult to implement with loss of the majority in the House of Representatives
- Financial weakness of many states
- High proportion of household consumption to GDP
- Low production capacity utilization
- Structurally high unemployment
- Reduced geographic flexibility of labor