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U.S.

Weekly Watch
August 2, 2010
Highlights
Economic Analysis

Kristin Lomicka U.S. real GDP growth slowed to 2.4% in 2Q10


kristin.lomicka@bbvacompass.com The Bureau of Economic Analysis (BEA) released its advance estimate of GDP for 2Q10.
Hakan Danış The report shows that the US economy grew 2.4% (q/q, annualized) in the second quarter
Hakan.Danis@bbvacompass.com of 2010. In conjunction, the BEA announced that it revised up its 1Q10 estimate of real GDP
growth to 3.7% from 2.7%. The 2Q10 figure came in lower than our baseline scenario due to
the upward revision of first quarter estimates. The GDP report brought mixed news. The bad
news is the further slowdown in private consumption expenditures (PCE). The pace of PCE
growth slowed due to the ongoing deleveraging process, increased uncertainty in the
economy and the high unemployment rate. The good news is the strong growth in residential
(RI) and non-residential investment (NRI). Business demand is expected to continue to firm,
but residential investment will slow in 2H10 due to the expiration of the tax credit, which
boosted RI in 2Q10. Government spending and the change in private inventories also made
large contributions to the economic growth, but net exports were a significant drag. Imports
rose at a considerably faster pace than exports. The second quarter numbers are consistent
with our baseline scenario that the US economic recovery will slow in 2H10 and 2011. We
expect the US economy to grow 3.0% in 2010 and 2.5% in 2011.

Fed’s Beige Book shows modest growth in the beginning of 3Q10


The Federal Reserve’s Beige Book reported a modest improvement in economic activity
since that last release on June 9. In line with indications from the ISM and regional
manufacturing indices, manufacturing activity continued to improve, but at a slower pace in
some districts. Furthermore, consumer spending continued to pick up modestly, but strength
focused on apparel, food and other necessities rather than big ticket items. The labor market
is also improving gradually. Many districts reported increased demand for temporary hires,
which illustrates that businesses are still hesitant to commit to full-time employees. On the
downside, both residential and commercial real estate remain weak points for the economy.

Graph 1
Contribution to Real GDP (percentage Graph 2
points)
Char
Real GDP (year-over-year % change)
8 6
6 GDP PCE NRI
4
4
2 2
0 0
-2
-2
-4
-4
-6
-8 -6
00
01
02
03
04
05
06
07
08
09
10
D07

D08

D09
M07
J07

M08
J08

M09
J09

M10
J10
S07

S08

S09

Source: Federal Reserve Source: NAR & U.S. Census Bureau


U.S. Weekly Watch
August 2, 2010

Week Ahead
ISM Manufacturing Index (July, Monday 10:00 ET)
Forecast: 55.0 Consensus: 54.0 Previous: 56.2

The regional manufacturing indices have indicated that the pace of expansion in the
manufacturing industry slowed in July. Accordingly, the ISM Manufacturing Index is
expected to slide down to 55. Nevertheless, the index will remain at a level consistent with
economic growth for the fourteenth consecutive month. Manufacturing comprises
approximately 70% of industrial production. As a result, the pace of expansion of industrial
production may slow in July as well. This outcome would be consistent with our
expectation that the rate of economic expansion will slow in 3Q10.

Personal Income and Outlays (June, Tuesday 8:30 ET)


Forecast: 0.1%, 0.2% Consensus: 0.2%, 0.1% Previous: 0.4%, 0.2%

Personal income is expected to rise for the eleventh consecutive month, but at a slower
pace given the decline in June’s non-farm payrolls. As income firms, so will personal
spending However, June’s decline in retail sales and sluggish consumer confidence point
to slow growth in this arena. The key driver of consumer spending will be employment.
While consumers now feel more secure in the jobs than during the recession, those that
are unemployed are still struggling to find work. Given our expectation that the labor
market will continue to improve at a slow pace, consumer spending will follow suit.

Pending Home Sales Index (June, Tuesday 10:00 ET)


Forecast: 4.1% Consensus: 3.7% Previous: -30.0%

After May’s nosedive to the lowest level in the history of the index, pending home sales
are forecasted to inch up 4.1%. One effect of the tax credit is that people who may have
been planning to buy a home during the summer months accelerated their purchases in
order to receive the tax benefit. As a result, post-tax credit demand is low. Nevertheless,
the environment remains favorable to buyers — the employment situation is improving,
home prices are low and mortgage rates are favorable. Given this setting, we expect
housing demand to gradually improve throughout the year.

Non-Farm Payrolls (July, Friday 8:30 ET)


Forecast: -112K Consensus: -60K Previous: -125K

Total non-farm payrolls will drop for the second consecutive month in July due to the
termination of temporary Census jobs. Private payrolls, on the other hand, are expected to
rise, but at a slow pace. In sum, the private sector has added 593K jobs in 2010, but the
pace has not been strong enough to significantly move the unemployment rate. The
market will look for surprises in the private payrolls figure. A negative surprise would feed
market fears about weak economic growth in 2H10.

Market Impact
This week’s economic data will give some of the first insight into third quarter economic
performance. The non-farm payrolls report will be the most watched as strong private
sector job growth will be the catalyst for consumer spending. However, this week’s data is
expected to show that the economy is continuing to grow, but at a slow pace.

REFER TO IMPORTANT DISCLOSURES ON LAST PAGE OF THIS REPORT PAGE 2


U.S. Weekly Watch
August 2, 2010

Financial Markets
Graph 3 Graph 4
Stocks (Index, KBW) Commodities (Dpb & DpMMBtu)
11,500 60 90 8
WTI
11,000 Banks 55 80 7
10,500 50 6
70
10,000 5
45
9,500 60
Dow Jones 40 4
9,000 50
35 3
8,500 Natural gas
40 2
8,000 30
7,500 25 30 1

Jun09

Oct09

Dec09

Feb10

Jun10
Aug09

Apr10
Jun09

Oct09

Dec09

Feb10

Jun10
Aug09

Apr10
Source: Bloomberg & BBVA Research Source: Bloomberg & BBVA Research

Graph 5 Graph 6
Currencies (Dpe & Ypd) Volatility (Vix, Index)
50
1.55 99
Euro
1.50 97 40
1.45 95
30
1.40 93
1.35 91 20
1.30 89
Yen
1.25 87 10 Jun09

Oct09

Dec09

Feb10

Jun10
Aug09

Apr10
1.20 85
Jun09

Oct09

Dec09

Feb10

Jun10
Aug09

Apr10

Source: Bloomberg & BBVA Research Source: Bloomberg & BBVA Research

Graph 7 Graph 8
Commercial Paper Issuance (US$Bn) TED & BAA Spreads (%)
1,400 0.6 4.0
1,350 0.5 BAA
1,300 3.5
1,250 0.4
1,200 0.3 3.0
1,150
0.2
1,100 2.5
1,050 0.1 Ted
1,000 - 2.0
Jul09

Nov09

Jan10

Mar10

May10

Jul10
Sep09

Jun09

Oct09
Dec09
Feb10

Jun10
Aug09

Apr10

Source: Bloomberg & BBVA Research Source: Bloomberg & BBVA Research

REFER TO IMPORTANT DISCLOSURES ON LAST PAGE OF THIS REPORT PAGE 3


U.S. Weekly Watch
August 2, 2010

Economic Trends
Graph 10
Graph 9 BBVA US Monthly Activity Index & Real
BBVA US Weekly Activity Index Gross Domestic Product
(3 month % change) (4Q % change)
15 6 1.0
10 GDP 0.5
4
5 0.0
0 2
-0.5
-5 0
-1.0
-10
-2
-15 MAI -1.5
-20 -4 -2.0
-25 -6 -2.5
06 07 08 09 10 95 97 99 01 03 05 07 09

Source: BBVA Research Source: BBVA Research & BEA

Graph 11 Graph 12
BBVA US Surprise Inflation Index BBVA US Surprise Activity Index & 10-yr
(Index 2004-09=100) Treasury (Index 2004-09=100 & %)
140 150 6.0
SAI
130
130 5.0
120
110 110 4.0
100 90 3.0
90 10yrTN
70 2.0
80
70 50 1.0
D03
J04
D04
J05
D05
J06
D06
J07
D07
J08
D08
J09
D09
J10

2006 2007 2008 2009 2010

Source: BBVA Research Source: Bloomberg & BBVA Research

Graph 14
BBVA US Recession Probability Model
Graph 13
(Recession episodes in shaded areas,
BBVA US Leading Inflation Index & Core
%)
Inflation (Qoq % change)
10 1 100%
LII
5 0.8
80%
0
0.6
-5 60%
0.4
-10
0.2 40%
-15 Core
-20 0 20%
-25 -0.2 0%
O05

O06

O07

O08

O09
A05

A06

A07

A08

A09

A10

687174778083868992959801040710

Source: BLS & BBVA Research Source: BBVA Research

REFER TO IMPORTANT DISCLOSURES ON LAST PAGE OF THIS REPORT PAGE 4


U.S. Weekly Watch
August 2, 2010

Yield Curve and Interest Rates


Table 1 Graph 15
Key Interest Rates, % Treasuries Yield Curve, %
We e k 4 - We e k s Year 5.0
La s t a go a go a go
4.5
P rime Rate 3.25 3.25 3.25 3.25 4.0
3.5
Credit Card (variable) 13.44 13.44 13.44 11.16 Last
3.0 3 Months ago
New A uto (36-mo nths) 6.16 6.17 6.33 7.08 2.5 Year Ago

Helo c Lo an 30K 5.55 5.56 5.58 5.78 2.0


1.5
30-year Fixed M o rtgage * 4.54 4.56 4.58 5.25
1.0
M o ney M arket 0.75 0.75 0.78 1.20 0.5
2-year CD 1.48 1.51 1.55 1.96 0.0
1M 3M 6M 2Y 5Y 10 Y 30 Y
5-year CD 2.43 2.46 2.53 2.64

* Freddie Mac National Mortgage Homeowner Commitment 30 Source: Bloomberg


Year US
Source: Bloomberg and BBVA Research

Quote of the Week


Federal Reserve Bank of Boston President Jame Bullard
As quoted by Bloomberg
July 29, 2010

“The U.S. is closer to a Japanese-style outcome today than at any time in recent history,”
Bullard said, warning in a research paper released yesterday about the possibility of
deflation. “A better policy response to a negative shock is to expand the quantitative easing
program through the purchase of Treasury securities.”

Economic Calendar
Date Event Period Forecast Survey Previous
2-Aug ISM Manufacturing JUL 55 54 56.2
2-Aug ISM Prices Paid JUL 55.5 54.5 57
2-Aug Construction Spending MoM JUN -0.80% -0.50% -0.20%
3-Aug Personal Income JUN 0.10% 0.20% 0.40%
3-Aug Personal Spending JUN 0.20% 0.10% 0.20%
3-Aug PCE Deflator (YoY) JUN 0.10% 1.30% 1.90%
3-Aug Factory Orders JUN -0.20% -0.30% -1.40%
3-Aug Pending Home Sales MoM JUN 4.10% 3.70% -30.00%
3-Aug Total Vehicle Sales JUL 11.9M 11.60M 11.08M
4-Aug ADP Employment Change JUL 28K 35K 13K
4-Aug ISM Non-Manf. Composite JUL 54 53 53.8
5-Aug Initial Jobless Claims 31-Jul 453K 455K 457K
5-Aug Continuing Claims 24-Jul 4551K 4512K 4565K
6-Aug Change in Nonfarm Payrolls JUL -112K -60K -125K
6-Aug Unemployment Rate JUL 9.60% 9.60% 9.50%
6-Aug Avg Hourly Earning MOM All Emp JUL 0.00% 0.10% -0.10%
6-Aug Avg Weekly Hours All Employees JUL 34.1 34.1 34.1
6-Aug Consumer Credit JUN -$7.5B -$5.7B -$9.1B

REFER TO IMPORTANT DISCLOSURES ON LAST PAGE OF THIS REPORT PAGE 5


U.S. Economic Watch
July 19, 2010

Chief Economist for US and Mexico


Jorge Sicilia
J.Sicilia@bbva.bancomer.com

Chief Economist for US


Nathaniel Karp
Nathaniel.karp@bbvacompass.com

Ignacio San Martin Marcial Nava Jason Frederick


Ignacio.SanMartin@bbvacompass.com Marcial.Nava@bbvacompass.com Jason.Frederick@bbvacompass.com

Jeffrey Owen Herzog Hakan Danış Kristin Lomicka


Jeff.Herzog@bbvacompass.com Hakan.Danis@bbvacompass.com Kristin.Lomicka@bbvacompass.com

Contact details
BBVA Research
5 Riverway Drive
Houston, Texas 77056
ResearchUSA@bbvacompass.com
BBVA Research reports are available in English and Spanish

PAGE 6
U.S. Economic Watch
July 19, 2010

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