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US: 2010 growth at 3.7%
January 13, 2010

As 2009 draws to a close, we focus on some economic indicators to suggest why growth in 2010 may exceed current expectations.

Author : iFAST Research Team

Untitled Document
Chart 1: Consensus attempting to be conservative
Chart 2: unemployment lagging, payrolls rebound first
Chart 3: capital expenditure to gdp lowest since 1971
Chart 4: inventory cycle to rebound in 2010

Key Points

  • As at 24 December 2009, consensus expects 2.6% y-o-y growth in 2010, lower than our 3.7% estimate
  • Common for unemployment to lag a recovery, and nonfarm payrolls and temporary hiring are already rebounding
  • Consumption slow to recover, but will be sustained by improvements in job market and rising household net worth (estimated +0.8%)
  • Investments to be the key contributor, helped by inventory cycle rebound (estimated +2.9%)
  • Inventory cycle rebound alone can add 1% to 1.4% to 2010 GDP growth
  • 2009 caps a decade of poor returns for the US market, but better times lie ahead




From the financial crisis and economic downturn which spanned across 2008 and 2009, one thing is apparent: whatever happens in the US still has a profound impact on the rest of the world. As 2009 draws to a close, we look at key aspects of the US economy for an idea of how it will fare in 2010.

Consensus expects mild growth in 2010, we think otherwise

As at 24 December 2009, the consensus expects 2.6% growth in GDP for 2010, up from estimates of about 2% earlier in 2009 (see Chart 1). The consensus was wrong by a significant margin for 2009 full-year forecasts, and estimates were continuously being revised downwards throughout the whole of 2009 to current expectations of a 2.5% contraction.

Despite the significantly large decline in economic output for 2009 (resulting in a low base for year-on-year comparisons), concerns over weak consumer spending amidst high unemployment and slumping home prices have led to economists being fairly conservative in estimating growth for 2010. We think that the consensus is once again being overly pessimistic (after being overly optimistic in late 2007 and early 2008). Our estimates for 2010 growth are significantly higher, at 3.7%, and we explain why in this article.  

Worrisome job market already showing signs of life

At this juncture, the key issue troubling most pessimists is the high unemployment rate. The argument is that without jobs, consumers have diminished spending ability, hurting the key personal consumption component (approximately 70% of GDP) of economic growth. The US unemployment rate recently breached 10% (to 10.2% in October 2009), the highest since 1983. With the unemployment rate forecasted to be at 10% in 2010 (according to Bloomberg consensus estimates), this certainly appears to be a strong case against a recovery in the US.

Fortunately, we can look beyond the high unemployment rate (which has repeatedly shown its ability to lag the economic cycle, see Chart 2) for more clues on the health of the job market. The unemployment rate lagged the economic recovery in several instances, most notably in 1990 and 2001, where unemployment continued to rise even after the recession ended. In other instances, the ending of the recession coincided with the peak levels of unemployment.

On the other hand, nonfarm payroll data has been more accurate at indicating improvements in the economy. As shown in Chart 2, declines in nonfarm payrolls have shrunk considerably towards the end of recessions, often turning positive (indicating net hiring) before the recession ends. Latest nonfarm payroll data showed 11,000 jobs lost in November 2009, and while the change is still negative, it is in stark contrast to the 741,000 jobs lost in January 2009, the largest monthly loss of jobs in the current cycle.

As more evidence that a recovery in the job market is underway, temporary hiring has picked up in recent months. US Bureau of Labour Statistics data show a rebound in temporary workers from a low of 1.745 million in July 2009 to 1.862 million in November. The measure rose by 52,000 in November, following a 44,000 increase in October. In a recovery, the uncertain conditions mean employers are reluctant to hire permanent workers, but require additional manpower to cope with increasing output. Thus, it is not surprising to see temporary hiring rising in advance of a recovery in unemployment.

With this in mind, investors may wish to consider following the changes in nonfarm payrolls and temporary help for a better indication of the job market, rather than placing utmost importance on the forecasted 10% unemployment rate next year.

Table 1: Contributions to Percent Change in Real GDP Growth









    Gross domestic product (y-o-y % growth)                             








Personal consumption expenditures                      








Gross private domestic investment                       








Net exports of goods and services                      








Government consumption expenditures
and gross investment








Source: US Bureau of Economic Analysis, * denotes iFAST estimates

Consumption slow to recover, but will be sustained by improvements in job market and rising household net worth (estimated +0.8%)

As mentioned in a prior article (“Will a turnaround in US consumption occur?”), we are still of the opinion that consumption will be a critical driver of US GDP in years to come. As evidenced from the weak employment trends component of the Conference Board Consumer survey, perceived worries over unemployment could mean muted consumption growth in early 2010, with stronger consumption growth coming only in 3Q 10 and 4Q 10 as companies begin hiring again.

The impact of household net worth is also important, as perceived wealth has historically influenced the consumer’s willingness to spend. US households have seen their net worth climb 10.2% to US$53.4 trillion (from 1Q 09 to 3Q 09), but this is still 19.1% lower than the peak of US$66 trillion in 2Q 07. Improving home prices and a sharp recovery in financial asset prices should help household net worth rise further into 2010, but consumption will face strong headwinds in the form of employment uncertainty and further deleveraging of household debt (as consumers continue to pay down existing borrowings).

With these opposing forces in mind, we are looking at just 0.8% year-on-year growth for personal consumption expenditures in 2010, significantly lower than the 1.8% to 2.4% growth seen between 2004 and 2007. Going into 2011, consumption growth is likely to be much stronger.

Investments to be the key contributor in 2010, helped by business investments and inventory cycle rebound (estimated +2.9%)

The excesses in the US housing market coupled with the lack of business expansions in the downturn mean that gross private domestic investment is currently on course to subtract 3.4% from 2009 full year growth. In real terms, gross private domestic investment has fallen to levels last seen in 1997, and we see this as the key area which should boost GDP growth in 2010.

Low (Fed-induced) mortgage rates, a housing credit scheme and a 32.6% (peak to trough) fall in the S&P/Case-Shiller home price index has resulted in increased interest in the US housing market, translating into gains in home sales and home-building activity. Housing activity should be sustained into 2010, which will boost the residential investment component of GDP. Current low absolute yields on corporate debt and significantly improved market sentiment mean that companies are in a much better position to fund capital expenditure, which has fallen to just 6.3% of GDP, the lowest percentage since 1971 (see Chart 3). Most companies attempt to invest early in an economic cycle upturn to benefit from the gains when the economy gets back on track. With a recovery now largely expected over the next two to three years, we expect companies to ramp up on expansionary plans in 2010.

We had previously highlighted the impact of an inventory rebound potentially boosting 3Q 09 GDP. Inventories were still declining in 3Q 09, but by less than the annualised US$160.2 billion in 2Q 09, resulting in a net positive contribution. The inventory cycle looks set to rebound in 2010, with seasonally adjusted US Manufacturing & Trade inventories rising in October, the first monthly increase in 14 months. Back-of-the-envelope calculations show that even if business inventories remain unchanged at 3Q 09 levels, this already contributes 1% to 2010 GDP growth. We are expecting inventory restocking to add approximately 1.4%, and estimate gross private domestic investment to add 2.9% to 2010’s GDP growth, the largest component of growth next year.

Net exports (estimated -0.7%) and Government Spending (estimated +0.7%)

The dollar index (which measures the value of the USD against a basket of major world currencies) has declined 12.7% between 5 March 2009 and 24 December 2009, making US exports cheaper. Inline with the cheaper greenback, US exports have shown a resurgence in 3Q 09, gaining an annualised 17.8% on a quarter-on-quarter basis. Imports however, rose faster by 21.3% from 2Q 09, resulting in a negative contribution from net exports. This negative contribution is likely to continue into 2010, as the inventory restocking cycle increases imports.

Government spending will likely be sustained in 2010, with just 26.3% of the US$792 billion stimulus package spent so far (according to ProPublica). The US$871 billion health care bill aims to reduce the healthcare component of Government spending, but aims to meet goals in 2016-2019, and is unlikely to significantly impact growth of government spending in 2010.

2009 caps a poor decade of performance for US stocks, but better times lie ahead

Table 2: Growth by decade


Nominal Growth

Real Growth

S&P 500 Returns**
































-10.8% (as at end Nov 09)

Source: Bureau of Economic Analysis, Bloomberg; *2000 to 2008, **based on total returns in USD including dividends

As 2009 draws to a close, the S&P 500 (as at 28 December 2009) remains 23.2% below its close on 31 December 1999, a decade of poor returns. This is clearly disappointing for US market investors, as the previous occasion the S&P 500 returned a negative performance for an entire decade was in the 1930s (see Table 2), a period which encompassed the Great Depression.

While market performance in the most recent decade has been depressing for most, we are keen to point out that the US economy grew 54.4% (from end 2000 to end 2008) in nominal terms, and the slump for 2009 will hardly put a major dent in this growth figure. The US economy actually contracted 11% in nominal terms during the 1930s, which vindicates the -28.8% total return of the US stock market back then. The net loss of the S&P 500 in the current decade is also skewed by the high base effect for comparison – the stock market was bubbling away in 1999 when technology stocks were in vogue, resulting in a largely overvalued stock market.

With the end of 2009, we look forward to the return of growth for the US economy, which should translate into future gains for the stock market, as well as better times ahead for investors.


related articles:

US: Third quarter earnings season starts with a bang!
5 Reasons Why the US Market May Be Past A Bottom

Will a turnaround in US consumption occur?
US: Upgraded to a 4 Stars Market!

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