After year-on-year increases of more than 40% in the years 2007 to 2009, Crédito y Caución expect corporate insolvencies to decrease by 5% in 2010, and thus to stabilise, albeit at a high level. According to the latest figures provided by the United States Courts, the number of business bankruptcy cases filed in federal courts during the three months to the end of September 2010 decreased year-on-year from 15,177 to 13,957.
Current expectations of an ongoing recovery, Credito y Caución forecast GDP growth of 3.2% for 2011, suggest a further improvement in corporate insolvencies for this year. Crédito y Caución expects a further year-on-year fall in business failures of 10%: to 51,753 cases.
December 2010´s median Expected Default Frequency [EDF] for US listed companies continued the moderating trend seen in recent months, dropping 16 basis points on the previous month, to 92 basis points. This constitutes a 50 basis points reduction since the start of 2010, and the lowest corporate EDF level since September 2008. The improvement is due mainly to a rise in equity prices and a simultaneous reduction in market volatility. However, the current level still reflects default conditions well above their long-term average, with listed US companies facing significantly higher default risks than in previous years.
While developments in the business sector look more benign, non-business bankruptcy filings continue to rise. According to the United States Courts, cases filed in federal courts rose 14.4% year-on-year in the fiscal year 2010, the 12 month period to 30 September, 2010, to 1,538,088 cases, compared to 1,344,095 cases in the fiscal year 2009 and 1,004,342 cases in 2008. This is the highest number of non-business filings for a fiscal year since 2005.
Main economic developments
According to the second estimate by the US Bureau of Economic Analysis [BEA] end of February, real gross domestic product [GDP] increased by 2.8% on the previous quarter in Q4 of 2010, compared to a 2.6% quarterly rise in the third quarter. This small acceleration in growth can be primarily attributed to positive contributions from private consumption, net exports and non-residential fixed investments.
According to the BEA, the trade balance deficit was US$ 497.8 billion in 2010, up 32.8% from 2009. As a percentage of United States GDP, the deficit was 3.4% last year, up from 2.7% in 2009. Imports rose US$ 384.0 billion to US$ 2,329.7 billion in 2010 [19.7%], while exports increased US$ 261.0 billion to US$ 1,831.8 billion [16.6%]. Decembers exports of goods and services [worth US$ 163 billion] were the highest since July 2008. Overall, a weakening US$ exchange rate has helped to sustain export growth and is expected to continue to do so in 2011.
Business confidence in the manufacturing sector has recovered comprehensively since mid-2009. According to the Institute for Supply Management, activity in the manufacturing sector expanded in January 2011 for the eighteenth consecutive month, with strong new orders, both domestic and export. According to the Federal Reserve, in the October-December 2010 period industrial production increased at an annual rate of just 2.4%, a slower pace than in earlier quarters. The capacity utilisation rate of all industries continued to rise in the second half of 2010 and stood at 76% in December. That said, this is still almost 5% below pre-downturn averages, and therefore the expectation is that companies will remain cautious about any sustained capital expenditures. This caution may impede the process of getting the recovery back on a firmer footing.
According to BEA preliminary estimates, the quarterly increase in real personal consumption expenditures in the last quarter of 2010 was 4.4%, compared to a 2.4% increase in the third quarter, and was therefore, together with exports, a major contributor to GDP growth. US retail trade increased for the sixth consecutive month in December: up 0.6% on the previous month. This was slightly below private-sector expectations of 0.8%, as retailers began their sales earlier and suffered from adverse weather conditions. Year-on-year retail sales rose 6.6%: the largest annual increase since 1999. Excluding sales of automobiles, retail sales grew 0.5% in December and a strong 5.9% for the full year.
However, consumer confidence remains well below its pre-downturn highs, despite a pick-up in January 2011, after showing signs of stalling and falling back in the previous months. Consumers continue to be wary of further developments in the job market and of the economic outlook for the coming year.
According to the US Bureau of Labor Statistics, the unemployment rate stood at 9% in January 2011: down 0.4% on the previous month. However, this apparent improvement owes much to the many discouraged unemployed i.e. those who have effectively given up on seeking employment who have opted out of the available labour force. At the same time, the Bureaus non-farm payroll statistics [covering goods producing, construction and manufacturing companies] show that employment increased only slightly in those sectors: by 36,000. This underlines the persistent weakness of the labour market, despite the rebound. The impact that this has on consumer confidence may well discourage domestic consumption growth in 2011 unless there is an improvement in the job market. Another impediment to a comprehensive recovery in consumer spending is the slump in house prices, adversely affecting household wealth. The price recovery has given way to renewed weakness, due partly to the expiry, in April 2010, of the Home Buyers Tax Credit Scheme, and this will depress both collateral values and credit raising capacity. The outlook is no better: despite the 40% decline in house prices since 2006, the current fundamentals point to ongoing weakness in the housing market. During Q4 of 2010 the S&P/Case Shiller National Home Price Index dropped 4.1% year-on-year and 3.9% on the previous quarter.
Falling house prices also have a potentially significant downside effect on the banking sector. The International Monetary Fund [IMF] estimates that US foreclosures continued to increase in 2010, leaving US banks facing losses of over US$ 2 trillion on their loan book. IMF figures also suggest that write-off rates on residential and commercial loans will put further pressure on bank capital and lending.
The Federal Reserves latest Senior Loan Office Survey on Bank Lending Practices indicates that bank lending has lagged behind the rebound in real economic activity, possibly because of continued uncertainty about future write-downs and weak capital positions. Improvements in the underlying conditions for credit supply have largely ground to a halt.
According to the Federal Reserve, net demand for business loans, mainly from large and medium-sized firms, again increased in Q4 of 2010, after falling in the previous quarter. However, demand from US consumers remains subdued, and this is likely to limit any short-term improvement in domestic consumption. Loans to US households have contracted steadily, at an annual rate of around 5%, since mid-2009, and any pick-up will be challenged by the renewed weakness in the US housing market, with lower house prices detracting from the collateral available against borrowings.
The US inflation rate fell markedly throughout the first half of 2010 and stood at 1.6% in January 2011. While having increased in the last couple of months, consumer price inflation is still below the Federal Reserves annual target rate of 1.6%-2%. Due to the economic uncertainty and persistently high jobless rate companies are reluctant to pass on higher commodity prices to customers. The concern of deflation or a prolonged price decline, together with renewed weakness in the domestic housing market and the sluggish labour market conditions, prompted the Federal Reserve Board to announce in November 2010 that it intends to embark on a second round of quantitative easing to reduce borrowing costs, which should help to spur economic growth and create jobs. This will involve buying an extra US$ 600 million in longer-term Treasury securities by the end of Q2 of 2010.
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