u.s. economic outlook april 2010

8/9/2019 U.S. Economic Outlook April 2010

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The U.S. economy

a short-term prognosis

4/16/2010

Harvest Topworth International

research


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ContentsThe Recession ......................................................................................................................................... 2

Introduction ............................................................................................................................................ 2

Sector Breakdown ............................................................................................................................... 4

Present Economic Conditions ................................................................................................................. 4

Business Cycle ..................................................................................................................................... 5

GDP ..................................................................................................................................................... 5

Central Bank outlook .......................................................................................................................... 6

Interest Rates ...................................................................................................................................... 7

Inflation ............................................................................................................................................... 7

Employment Report ............................................................................................................................ 8

Consumer Spending .......................................................................................................................... 10

Manufacturing and Service Sector Activity ....................................................................................... 12

Current Account ................................................................................................................................ 14

Corporate Earnings ........................................................................................................................... 16

Summary ............................................................................................................................................... 16

Charts .................................................................................................................................................... 18

Conclusion ............................................................................................................................................. 19


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The RecessionBeginning in the United States in December 2007 (and with much greater intensity since September

2008, according to the National Bureau of Economic Research), much of the industrialized world has

been undergoing a recession, a pronounced deceleration of economic activity. This global

recession has been taking place in an economic environment characterized by various imbalancesand was sparked by the outbreak of the financial crisis of 20072010. Although the late-2000s

recession has at times been referred to as "the Great Recession," this same phrase has been used to

refer to every recession of the several preceding decades. In July 2009, it was announced that a

growing number of economists believed that the recession may have ended.

The financial crisis has been linked to reckless and unsustainable lending practices compounded by

government intervention and the growing trend of securitization of real estate mortgages in

the United States. The US mortgage-backed securities, which had risks that were hard to assess,

were marketed around the world. A more broad based credit boom fed a global speculative

bubble in real estate and equities, which served to reinforce the risky lending practices. Theprecarious financial situation was made more difficult by a sharp increase in oil and food prices. The

emergence of Sub-prime loan losses in 2007 began the crisis and exposed other risky loans and over-

inflated asset prices. With loan losses mounting and the fall of Lehman Brothers on September 15,

2008, a major panic broke out on the inter-bank loan market. As share and housing prices declined

many large and well established investment and commercial banks in the United States

and Europe suffered huge losses and even faced bankruptcy, resulting in massive public financial

assistance.

A global recession resulted in a sharp drop in international trade, rising unemployment and slumping

commodity prices. In December 2008, the National Bureau of Economic Research (NBER) declaredthat the United States had been in recession since December 2007. Several economists have

predicted that recovery may not appear until 2011 and that the recession will be the worst since

the Great Depression of the 1930s. The conditions leading up to the crisis, characterised by an

exorbitant rise in asset prices and associated boom in economic demand, are considered a result of

the extended period of easily available credit, inadequate regulation and oversight, or increasing

inequality.

The recession has renewed interest in Keynesian economic ideas on how to combat recessionary

conditions. Fiscal and monetary policies have been significantly eased to stem the recession and

financial risks. Most economists believe that the stimulus should be withdrawn as soon as theeconomies recover enough to "chart a path to sustainable growth"

IntroductionThe economy of the United States is the worlds largest nominal economy. Its nominal gross

domestic product (GDP) was estimated at $14.2 trillion in 2009, which is about three times that of

the world's second largest national economy, Japan. Its GDP by PPP is almost twice that of the

second largest, China. The U.S. economy maintains a very high level of output per person (GDP per

capita, $46,442 in 2009, ranked at around number ten in the world). Historically, the U.S. economy

has maintained a stable overall GDP growth rate, a low unemployment rate, and high levelsof research and capital investment funded by both national and, because of decreasing saving rates,


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increasingly by foreign investors. In 2006, consumer spending made up 70 percent of the United

States Gross Domestic Product.

A central feature of the U.S. economy is the economic freedom afforded to the private sector by

allowing the private sector to make the majority of economic decisions in determining the direction

and scale of what the U.S. economy produces. This is enhanced by relatively low levels of regulation

and government involvement, as well as a court system that generally protects property rights and

enforces contracts. From its emergence as an independent nation, the United States has

encouraged science and invention.

The United States is rich in mineral resources and fertile farm soil, and it is fortunate to have a

moderate climate. It also has extensive coastlines on both the Atlantic and Pacific Oceans, as well as

on the Gulf of Mexico. Rivers flow from far within the continent, and the Great Lakesfive large,

inland lakes along the U.S. border with Canadaprovide additional shipping access. These extensive

waterways have helped shape the country's economic growth over the years and helped bind

America's 50 individual states together in a single economic unit.

The number of workers and, more importantly, their productivity help determine the health of the

U.S. economy. Throughout its history, the United States has experienced steady growth in the labor

force, a phenomenon that is both cause and effect of almost constant economic expansion. Until

World War I, most workers were immigrants from Europe, their immediate descendants, or African

Americans who were mostly slaves taken from Africa, or slave descendants. Beginning in the early

20th century, many Latin Americans immigrated; followed by large numbers of Asians following

removal of nation-origin based immigration quotas. The promise of high wages brings many highly

skilled workers from around the world to the United States.

In the United States, the corporation has emerged as an association of owners, known as

stockholders, who form a business enterprise governed by a complex set of rules and customs.

Brought on by the process of mass production, corporations, such as General Electric, have been

instrumental in shaping the United States. Through the stock market, American banks and investors

have grown their economy by investing and withdrawing capital from profitable corporations. Today

in the era of globalization, American investors and corporations have influence all over the world.

The American government is also included among major the investors in the American economy.

Government investments have been directed towards public works of scale, military-industrial

contracts, and the financial industry.

While consumers and producers make most decisions that mould the economy, government has a

powerful effect on the U.S. economy in at least four areas, as the government uses a capitalist

system. Strong government regulation in the U.S. economy started in the early 1900s with the rise of

the Progressive Movement; prior to this the government promoted economic growth through

protective tariffs and subsidies to industry, built infrastructure, and established banking policies,

including the gold standard, to encourage savings and investment in productive enterprises.

Recently there have been calls for the United States to increase its manufacturing base employment

to 20% of the workforce, commenting that the U.S. has outsourced too much in some areas and can

no longer rely on the financial sector and consumer spending to drive demand.


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Sector Breakdown

Energy

The United States is the largest energy consumer in terms of total use, using 100 quadrillion

BTUs (105 exajoules, or 29000 TWh) in 2005. The U.S. ranks seventh in energy consumption per-

capita after Canada and a number of small countries. The majority of this energy is derived

from fossil fuels: in 2005, it was estimated that 40% of the nation's energy came from petroleum,

23% from coal, and 23% from natural gas. Nuclear power supplied 8.4% and renewable

energy supplied 6.8%, which was mainly from hydroelectric dams although other renewables are

included.

American dependence on oil imports grew from 24% in 1970 to 65% by the end of 2005. At the

current rate of unchecked import growth, the US would be 70% to 75% reliant on foreign oil by the

middle of the next decade. Transportation has the highest consumption rates, accounting for

approximately 68.9% of the oil used in the United States in 2006, and 55% of oil use worldwide.

Agriculture

Agriculture is a major industry in the United States and the country is a net exporter of food. The

United States controls almost half of world grain exports.

Products include wheat, corn, other grains, fruits, vegetables, cotton; beef, pork, poultry, dairy

products; forest products; fish.

Manufacturing

The United States is the world's largest manufacturer, with a 2007 industrial output of US$2.69trillion.

Main industries include petroleum, steel, motor vehicles, aerospace, telecommunications,

chemicals, electronics, food processing, consumer goods, lumber, and mining. A total of 3.2 million

one in six U.S. factory jobs have disappeared since the start of 2000.

Finance

The New York Stock Exchange is the largest stock exchange in the world by value of its listed

companies' securities. As of October 2008, the combined capitalization of all domestic NYSE listed

companies was US$10.1 trillion.

NASDAQ, is another American stock exchange. It is the largest electronic screen-based equity

securities trading market in the United States. With approximately 3,800 companies and

corporations, it has more trading volume per hour than any other stock exchange in the world.

Present Economic ConditionsIn order to assess the current state of the economy, a whole spate of different economic and

structural factors has to be closely scrutinised. These include:

1. Business Cycle


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2. GDP

3. Central Banks

4. Interest Rates

5. Inflation Rates

6. Employment Report

7. Consumer Spending

8. Manufacturing and Service activity

9. Current Account

10. Corporate Earnings

Business Cycle

The U.S. economy was mired in recession since December 2007, according to the government, and is

yet to officially come out of that cycle according to the Business Cycle Dating Committee of the

National Bureau of Economic Research. Recent data indicate the economy is definitely out of the

recessionary cycle and well on the road to recovery but such statements can be clouded by the

significant stimulus policies of the U.S. central bank which would eventually need to be phased out.

The effect of removal of stimulus and consequent tighter monetary policies can again threaten to

pull the economy back into contracting mode.

Nevertheless the moves in asset prices are classic indicators of the economy being in the initial

recovery phase whereby prices tend to pick up significantly due to hopes for future growth. The

major stock indices which can be used as a harbinger for growth, have been lifted approximately

70% since the troughs hit in March 2009.

GDP

The GDP growth rate is the most important indicator of economic health. If GDP is growing, so will

business, jobs and personal income. If GDP is slowing down, then businesses will hold off investing in

new purchases and hiring new employees, waiting to see if the economy will improve. This, in turn,

can easily further depress GDP and consumers have less money to spend on purchases. If the GDP

growth rate actually turns negative, then the U.S. economy is heading towards a recession.

Because so many things are measured in GDP, the BEA often revises the GDP growth rate within a

month after releasing it. This can impact the stock market as investors get this new information

about the state of the economys health.

The economy ended 2009 with a whopping 5.7% growth rate for the fourth quarter according to the

final estimate of 4th

quarter GDP. However, some concerns continue to persist particularly as the


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gains were lead in part due to businesses stocking up low inventory. Real estate and consumer

spending actually slowed in Q4. These are needed to sustain any lasting recovery.

The next release is for the first quarter GDP which will be released on April 30 th 2010 and it is

expected to come in above 3 percent, which will be a sign that the economy continues to improve

steadily.

U.S. GDP (Billions of dollars)

Central Bank outlook

Over the past year, the Federal Reserve has employed a wide array of tools to promote economic

recovery and preserve price stability. The target for the federal funds rate has been maintained at a

historically low range of 0 to 1/4 percent since December 2008. The FOMC continues to anticipate

that economic conditions--including low rates of resource utilization, subdued inflation trends, and

stable inflation expectations--are likely to warrant exceptionally low levels of the federal funds rate

for an extended period.

To provide support to mortgage lending and housing markets and to improve overall conditions in

private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency

mortgage-backed securities and about $175 billion of agency debt. We have been gradually slowing

the pace of these purchases in order to promote a smooth transition in markets and anticipate that

these transactions will be completed by the end of March. The FOMC will continue to evaluate its

purchases of securities in light of the evolving economic outlook and conditions in financial markets.

In response to the substantial improvements in the functioning of most financial markets, the

Federal Reserve is winding down the special liquidity facilities it created during the crisis. OnFebruary 1, a number of these facilities, including credit facilities for primary dealers, lending


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programs intended to help stabilize money market mutual funds and the commercial paper market,

and temporary liquidity swap lines with foreign central banks, were allowed to expire .1The only

remaining lending program for multiple borrowers created under the Federal Reserve's emergency

authorities, the Term Asset-Backed Securities Loan Facility, is scheduled to close on March 31 for

loans backed by all types of collateral except newly issued commercial mortgage-backed securities

(CMBS) and on June 30 for loans backed by newly issued CMBS.

In addition to closing its special facilities, the Federal Reserve is normalizing its lending to

commercial banks through the discount window. The final auction of discount-window funds to

depositories through the Term Auction Facility, which was created in the early stages of the crisis to

improve the liquidity of the banking system, will occur on March 8. Last week we announced that

the maximum term of discount window loans, which was increased to as much as 90 days during the

crisis, would be returned to overnight for most banks, as it was before the crisis erupted in August

2007. To discourage banks from relying on the discount window rather than private funding markets

for short-term credit, last week we also increased the discount rate by 25 basis points, raising the

spread between the discount rate and the top of the target range for the federal funds rate to 50

basis points. These changes, like the closure of most of the special lending facilities earlier this

month, are in response to the improved functioning of financial markets, which has reduced the

need for extraordinary assistance from the Federal Reserve. These adjustments are not expected to

lead to tighter financial conditions for households and businesses and should not be interpreted as

signalling any change in the outlook for monetary policy, which remains about the same as it was at

the time of the January meeting of the FOMC.

Interest RatesAlthough the federal funds rate is likely to remain exceptionally low for an extended period, as the

expansion matures, the Federal Reserve will at some point need to begin to tighten monetary

conditions to prevent the development of inflationary pressures. Notwithstanding the substantial

increase in the size of its balance sheet associated with its purchases of Treasury and agency

securities, we are confident that we have the tools we need to firm the stance of monetary policy at

the appropriate time.

It is expected the Fed may be forced to increase their federal funds rate, which stands at 0.30%

presently, by the third quarter this year. However, monetary policy is expected to stay loose for the

immediate month or so.

Inflation

The inflation rate in the United States was 2.10 percent in February of 2010 (rose slightly in March to

2.3% on an annual basis). Inflation rate refers to a general rise in prices measured against a standard

level of purchasing power. The most well known measures of Inflation are the CPI which measures

consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic

economy.
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Employment Report

The previous employment report in April showed the economy significantly created jobs for the first

time since March 2007. In summary the report outlined:

Employment in the U.S. increased in March by the most in three years and the

unemployment rate held at 9.7 percent as companies gained confidence the economic

recovery will be sustained.

Payrolls rose by 162,000 last month, less than anticipated, after a revised 14,000 decrease in

February that was smaller than initially estimated, figures from the Labor Department in

Washington showed. The increase included 48,000 temporary workers hired by the

government to help conduct the 2010 census. Average hourly earnings fell and hours

worked rose.

Part of the payroll gain last month likely reflected a rebound from the February blizzards

that set seasonal snowfall records in cities including Washington and Philadelphia,

shuttering some businesses during the week of the government survey. Any hiring that

would have taken place that week is figured into the March job count instead.

Hiring at the Census Bureau for the population count may have the biggest impact on payroll

figures in April through June, when the bulk of the additions will take place. The program will

then subtract from the job count the following months as employees are dismissed after the

work is done.

The agency said it will take on 1.15 million temporary workers in the first half of the year to

conduct the population count that occurs every 10 years.


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For that reason, economists will be excluding workers on public payrolls for much of the rest

of the year in gauging the state of the labor market.

The report from the Labor Department showed that government payrolls increased by

39,000 in March. State and local governments reduced employment by 9,000 during the

month, while the federal government added 48,000.

The so-called underemployment rate -- which includes part- time workers whod prefer a

full-time position and people who want work but have given up looking -- increased to 16.9

percent from 16.8 percent.

Factory payrolls increased 17,000 in March after rising 6,000 in the prior month. The median

forecast by economists called for a gain of 15,000.

Payrolls at builders rose 15,000 last month, the biggest gain since March 2007, afterdeclining 59,000. Financial firms reduced payrolls by 21,000, after a 15,000 drop the prior

month.

Service industries, which include banks, insurance companies, restaurants and retailers,

added 121,000 workers after an increase of 33,000 in February. Private service providers

added 82,000 workers to payrolls in March.

The number of temporary workers increased 40,000 in March. Payrolls at temporary-help

agencies often turn up before total employment because companies prefer to see a steady

increase in demand before taking on permanent staff.

Average hourly earnings fell 0.1 percent in March, the first drop since comparable records

began in 2006.

The average work week for all workers rose to 34 hours in March from 33.9 hours the prior

month, when winter storms temporarily closed some businesses.


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The conditions in the labour market have been steadily improving over the past three months since

it transpired that the economy lost more than 100,000 jobs during December 2009. Corporate

earnings have been steadily improving with more than 75% of firms releasing results that beat

market forecasts over the quarter ended December 2009. This can translate into an eagerness to

resume hiring. Consumer spending continues to increase which will mean demand for goods and

services will rise. Ultimately all of this indicates a fall in the unemployment rate back below 9% by

the end of this year.

Over the next two months, the labour market can prove erratic with the non-farm payrolls dataespecially vulnerable to volatility. One of the reasons the economy created jobs during March was

due to the advent of the U.S. Census, which prompted employers to boost hiring in the interim.

There are still threats that the economy can lose a few more jobs before the summer starts in

earnest during June and July and this can keep overenthusiastic buying momentum under wraps.

Consumer Spending

Consumer spendingor consumer demand or consumption is also known as personal consumption

expenditure. It is the largest part of aggregate demand or effective demand at the macroeconomic

level. There are two variants of consumption in the aggregate demand model, including induced

consumption (consumption that varies with levels of income) and autonomous consumption

(consumption financed by borrowing).

Factors affecting level of spending:

1. Taxes

2. Job stability and income growth

3. Consumer Sentiment

4. Inflation


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5. Monetary policy i.e. interest rates and money supply

The level of consumer spending can gauged by looking at consumer sentiment surveys and the level

of spending at retail outlets, and investment on housing.

Consumer confidence: The Conference Board Consumer Confidence Index, which had decreased inFebruary, rebounded in March. The Index now stands at 52.5 (1985=100), up from 46.4 in February.

The Present Situation Index increased to 26.0 from 21.7. The Expectations Index improved to 70.2

from 62.9 last month.

Consumers assessment of current-day conditions was less negative in March. Those claiming

conditions are "bad" decreased to 42.8 percent from 45.1 percent, while those claiming business

conditions are "good" increased to 8.6 percent from 6.8 percent. Consumers assessment of the

labor market was also less pessimistic. Those saying jobs are "hard to get" declined to 45.8 percent

from 47.3 percent, while those saying jobs are "plentiful" increased to 4.4 percent from 4.0 percent.

Consumers short-term outlook improved in March. Those anticipating conditions will worsen over

the next six months declined to 13.9 percent from 15.9 percent, while those anticipating an

improvement increased to 18.3 percent from 16.1 percent.

Regarding the outlook for the labor market, the percentage of consumers expecting fewer jobs inthe months ahead decreased to 21.6 percent from 24.7 percent. Those anticipating more jobs will

become available increased to 14.6 percent from 13.2 percent. The proportion of consumers

anticipating an increase in their incomes improved to 10.5 percent from 10.1 percent.

Retail Sales: The U.S. Census Bureau announced today that advance estimates of U.S. retail and food

services sales for March, adjusted for seasonal variation and holiday and trading-day differences, but

not for price changes, were $363.2 billion, an increase of 1.6 percent (0.5%) from the previous

month and 7.6 percent (0.5%) above March 2009. Total sales for the January through March 2010


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period were up 5.5 percent (0.3%) from the same period a year ago. The January to February 2010

percent change was revised from +0.3 percent (0.5%)* to +0.5 percent (0.3%).

Retail trade sales were up 1.8 percent (0.5%) from February 2010 and 8.2 percent (0.5%) above

last year. Gasoline stations sales were up 26.4 percent (1.5%) from March 2009 and motor vehicle

and parts dealers sales were up 14.1 percent (2.5%) from last year.

Retail sales are picking up considerably since the dark days of the recession and as consumer

demand picks up, it will have a significant effect on economic growth.

Housing data: The housing market has been one of the major concerns affecting the economic

recovery. The recession started because of the housing bubble whereby there was an explosion of

credit to homeowners without the requisite due diligence or effective safety checks on the recovery

of such loans. When billions of dollars worth of mortgage loans defaulted, there was an influx of

housing supply as banks forced foreclosures and took control of the property. Property values took a

significant hit and caused the housing market to fall into a slump.

Banks stopped mortgage lending which effectively dried up demand for homes. The U.S.

government took certain measures to stimulate the market, for example, the introduction of a tax

credit for first time home buyers but the gains have proven fleeting and there is still considerable

risk of another downturn in the housing market which threatens to derail the whole economy.

The figures for February were marginally positive with pending home sales increasing 8.2% and

existing homes sales up 5.02%. However, new home sales were down 2.22%. Underlying uncertainty

and caution will remain prevalent in the market over the coming months which can prove a drag on

asset prices.

Manufacturing and Service Sector Activity

Industrial production edged up 0.1 percent in February following a gain of 0.9 percent in January.Production was likely held down somewhat by winter storms in the Northeast. Manufacturing


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decreased 0.2 percent in February, with mixed results among its major industries. The output of

mines rose 2.0 percent, while the index for utilities rose 0.5 percent. At 101.0 percent of its 2002

average, industrial output in February was 1.7 percent above its year-earlier level. Capacity

utilization for total industry moved up 0.2 percentage point to 72.7 percent, a rate 7.9 percentage

points below its average from 1972 to 2009.

The manufacturing sector grew for the eighth consecutive month during March. The rate of growth

as indicated by the PMI is the fastest since July 2004. Both new orders and production rose above 60

percent this month, closing the first quarter with significant momentum going forward. Although the

Employment Index decreased 1 percentage point to 55.1 percent from February's reading of 56.1

percent, signs for employment in the sector continue to improve as the index registered a 10

percent month-over-month improvement, indicating that manufacturers are continuing to fill

vacancies. The Inventories Index provided a surprise as it indicated growth for the first time

following 46 months of liquidation perhaps signalling manufacturers' willingness to increase

inventories based on expected levels of activity.

A PMI in excess of 42 percent, over a period of time, generally indicates an expansion of the overall

economy. Therefore, the PMI indicates growth for the 11th consecutive month in the overall

economy, as well as expansion in the manufacturing sector for the eighth consecutive month. Ore

stated, "The past relationship between the PMI and the overall economy indicates that the average

PMI for January through March (58.2 percent) corresponds to a 5.4 percent increase in real gross

domestic product (GDP). In addition, if the PMI for March is annualized, it corresponds to a 5.9

percent increase in real GDP annually.


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The NMI (Non-Manufacturing Index) registered 55.4 percent in March, 2.4 percentage points higher

than the seasonally adjusted 53 percent registered in February, and indicating growth in the non-

manufacturing sector. The Non-Manufacturing Business Activity Index increased 5.2 percentage

points to 60 percent, reflecting growth for the fourth consecutive month. The New Orders Index

increased 7.3 percentage points to 62.3 percent, and the Employment Index increased 1.2

percentage points to 49.8 percent. The Prices Index increased 2.5 percentage points to 62.9 percent

in March, indicating an increase in prices paid from February. According to the NMI, 14 non-

manufacturing industries reported growth in March. Respondents' comments are mostly positive

about business conditions and the direction of the economy.

In March, the NMI registered 55.4 percent, indicating growth in the non-manufacturing sector for

the third consecutive month. A reading above 50 percent indicates the non-manufacturing sector

economy is generally expanding; below 50 percent indicates the non-manufacturing sector is

generally contracting.

Current Account

The U.S. current-account deficit--the combined balances on trade in goods and services, income, and

net unilateral current transfers--increased to $115.6 billion (preliminary) in the fourth quarter of

2009 from $102.3 billion (revised) in the third quarter. The increase was more than accounted for by


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an increase in the deficit on goods and, to a lesser extent, a decrease in the surplus on income. A

decrease in net unilateral current transfers to foreigners and an increase in the surplus on services

were partly offsetting.

Goods and services

The deficit on goods and services increased to $108.9 billion in the fourth quarter from $96.4 billion

in the third.

Goods The deficit on goods increased to $145.5 billion in the fourth quarter from $132.1 billion in

the third. Goods exports increased to $286.9 billion from $263.6 billion. Nearly all major end-use

categories of exports increased strongly. Capital goods increased $8.1 billion; industrial supplies and

materials increased $5.7 billion; automotive vehicles, parts, and engines increased $4.5 billion;

consumer goods increased $2.6 billion; and foods, feeds, and beverages increased $2.5 billion.

Goods imports increased to $432.4 billion from $395.7 billion. Most major end-use categories of

imports increased strongly. Industrial supplies and materials increased $13.2 billion, including a $6.6billion increase in petroleum and products. Capital goods increased $9.0 billion; automotive

vehicles, parts, and engines increased $7.5 billion; and consumer goods increased $6.7 billion.

Services The surplus on services increased to $36.5 billion in the fourth quarter from $35.7 billion in

the third. Services receipts increased to $131.8 billion from $129.2 billion. Nearly all major

categories of receipts increased, but the largest increases were in other private services (such as

business, professional, and technical services, insurance services, and financial services) and in

other transportation (such as freight and port services). Services payments increased to $95.2

billion from $93.4 billion. Most major categories of payments increased, but the largest increases

were in other transportation and inother private services.

Income

The surplus on income decreased to $25.1 billion in the fourth quarter from $29.1 billion in the third.

Investment income Income receipts on U.S.-owned assets abroad increased to $147.9 billion from

$141.6 billion. The increase was mostly accounted for by an increase in direct investment receipts.

Other private receipts (which consist of interest and dividends) also increased. U.S. government

receipts (which consist of interest) decreased. Income payments on foreign-owned assets in the

United States increased to $121.0 billion from $110.8 billion. The increase was more than accounted

for by an increase in direct investment payments. U.S. government payments (which consists of

interest) and other private payments (which consists of interest and dividends) both decreased.

Compensation of employees Receipts for compensation of U.S. workers abroad were virtually

unchanged at $0.7 billion, and payments for compensation of foreign workers in the United States

were virtually unchanged at $2.5 billion.

Unilateral current transfers Net unilateral current transfers to foreigners were $31.8 billion in the

fourth quarter, down from $35.0 billion in the third. The decrease was more than accounted for by a

decrease in U.S. government grants.


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Corporate Earnings

U.S. corporate earnings should top forecasts again in the first quarter, but the extent of the stock

market's rally means investors are expecting a lot from companies.

Standard & Poor's 500 companies' first-quarter profits are seen up 36.8 percent versus a year ago,

which would be a second straight quarter of year-over-year profit growth. The fourth quarter

marked the first of year-over-year gains since 2007's second quarter.

Still, investors are anxious to see if companies can beat expectations enough to push stock indexes

even higher. The S&P 500 now is up 75.4 percent from its March 2009 closing low.

However, much of the enthusiasm for quarterly profits may already be factored into lofty stock

prices. Stocks could be in danger of repeating the previous earnings period, when investors would

sell even after strong reports. The S&P 500 lost roughly 3 percent during earnings season.

Pre-announcements heading into the reporting period show more positive outlooks than average

and fewer negative ones, indicating company executives feel confident about results and analysts'

estimates. The news follows a strong fourth quarter in which 9.7 percent of companies raised

outlooks and 5.2 percent lowered outlooks -- the widest spread since 2001 -- in another sign of

improved confidence.

First-quarter revenue is seen rising 10 percent, which would be an improvement from 8 percent

growth in the fourth quarter While drastic cost cutting has let a much higher-than-average

percentage of companies beat analysts' earnings estimates in recent quarters, revenue has been

slower to recover. But some 70 percent of S&P 500 companies beat revenue estimates for the fourth

quarter -- up from 59 percent beating estimates for the third quarter. On earnings, 72 percent of

companies beat estimates, down from a record 79 percent in the previous quarter but still well

above the 61 percent in a typical quarter. The first quarter of 2009 marked the weakest period for

S&P 500 earnings since the first quarter of 2002, while the fourth quarter was the worst since at

least 1998, when Thomson Reuters started tracking the data.

Sectors expected to lead this year's first-quarter gains are financials, estimated to have a 205.2

percent jump in earnings from a year ago, followed by materials, seen posting a 176.4 percent rise,

and consumer discretionaries, estimated to report a 114.8 percent gain.

Summary

Indicators Trend Short-term

outlook

Effect on the

dollar

Effect on stock

values

Business Cycle Expanding Positive Strengthen Increase

Growth Expanding Positive Mixed Increase

Monetary Policy Loose but can

quickly become

restrictive

Remaining loose Mixed, as any

comments about

tighter policy

tends to

strengthen the

Mixed, with stock

prices tending to

fall as fears of

monetary

tightening surface


18/20

17

dollar

Fiscal Policy Loose Remaining loose None evident Increase

Inflation Low Remaining low Dollar weakens as

low inflation

indicates a loose

monetary policy

Increase

Employment Improving Mixed as there

are concerns that

businesses are

still not convinced

to implement

major hiring

initiatives

Mixed Mixed, job losses

would precipitate

a sell-off in risky

assets like stocks

Consumer

Spending

Increasing Positive Mixed, as the

phenomenon of

carry trade causes

the dollar to besold on positive

economic data

Increase

Manufacturing &

Service Sector

Growth

Expanding Positive Mixed, as the

phenomenon of

carry trade causes

the dollar to be

sold on positive

economic data

Increase

Current Account Deficit is

increasing

Imports expected

to rise further

Weakening effect,

currencies tend to

weaken on risingdeficits, as it

shows a

willingness to

borrow foreign

currency at the

domestic

currencys

expense.

Increase, a

current account

deficit is notnecessarily a bad

thing for a

countrys

economy as it

indicates an

expanding,

growing economy

which needs

more imports to

meet demand

CorporateEarnings

Improving Positive Mixed, as thephenomenon of

carry trade causes

the dollar to be

sold on positive

economic data

Increase,however a

slowdown in

growth rates of

earnings would

provide an excuse

for investors to

book profits in

existing stock

holdings.


19/20

18

ChartsDollar Index Weekly

DJIA Weekly


20/20

ConclusionThe U.S. economy is gradually recovering from the worst recession in nearly 75 years. The economy

started to expand around the middle of last year, in the third quarter, and average growth above

5.7% during the fourth quarter last year which is quite impressive. Business cycle analysis indicates

the economy is in the initial recovery stage and will fast move into the early upswing or expansionphase where the economy grows at the fastest exponential rate, and asset values tend to increase

simultaneously due to increased investment and expectations of fast growth.

The dollar has rebounded from last years lows with the dollar index up around 80 currently but that

has more to do with underlying issues with other currencies such as the pound and the euro rather

than a particular conviction on the part of investors to buy the dollar. Nevertheless in the short-term

as the U.S. economy continues to grow, the pressure on the Federal Reserve to tighten monetary

policy over the next three months will mount, and the dollar will increase which can have a negative

effect on the value of opposing currencies.

The stock market as can be evidenced from the chart for the DJIA has risen almost 70% from lows hit

in March 2009 and all of this has been on better corporate earnings over the past three quarters.

The major concern for stock investors over the next quarter is whether earnings growth slows down

and the economy stagnates again if the central bank tightens monetary policy. Technical indicators

also indicate an overbought condition in the market which needs to be rectified over the coming

quarters. Nevertheless if corporate earnings and economic indicators continue to grow, together

with the Feds pledge to keep interest rates low, the stocks can continue on their upward climb.

The major concerns affecting the economy in the short-term are in particular employment and the

housing market as both of these factors still show considerable risks of a reversal in fortunes. The

unemployment rate remains mired around 9.7% and there is practically no lending in the housing

market which has decreased demand for houses. Together with threats of higher interest rates,

some investors fear the economy can suffer a double dip recession if these indicators do not show

further improvement over the coming months.

In conclusion, it will be prudent to remain cautious until such concerns are discounted away or the

underlying uncertainties are reasonably removed. Fears of a meltdown in Europe due to structural

debt issues will also pressurise investor sentiment over the coming few months. Overall the

economy is growing but there will still be certain caveats or barriers on the path to recovery which

can limit buying momentum in both the currency and stock markets.

SOURCES: Courtesy Reuters, Financial Times, Bloomberg

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Harvest Topworth International is not in the investment advisory services and act only as introducing broker of a foreign principal and

information provided is only intended for internal distribution, or use by, any person where such distribution or use is not contrary to law orregulation, therefore, no such information provided shall constitute investment advice.

All reasonable care has been taken on to ensure that the information provided is accurate and complete and any opinions expressed are

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i f i

u.s. economic outlook april 2010

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