US Economic Weekly

Economics Research | Americas

ROUNDUP: FINISHING STRONG 2-3

A broad array of data indicates activity accelerated late in 2010 and the tax rate extension 7 January 2011
compromise struck in early December should ensure that momentum carries into 2011.
OUTLOOK: FIRMER TURF ON THE RECOVERY ROAD 4
Global Economics
The late-2010 pick-up in economic activity looks likely to carry into the first half of 2011, but
Contributing Economicts
persistent headwinds should slow growth in the second half of the year.
PREVIEW OF THE WEEK AHEAD 5-6 David H. Resler
The retail sales and Beige Book reports should point to greater momentum in activity. david.resler@nomura.com
+1 212 667-2415
US ECONOMIC CALENDAR 7
WEEK IN REVIEW 8 Aichi Amemiya
aichi.amemiya@nomura.com
GLOBAL LETTER: NEW YEAR’S STOCK TAKE 9 +1 212 667-9347

Developments in the past month have been broadly in line with our global outlook for 2011. Zach Pandl
Zach.pandl@nomura.com
GLOBAL ECONOMIC CALENDAR 10 +1 212 667-9668

This report can be accessed electronically

via: www.nomura.com/research or on
Bloomberg (NOMR)

Market watch
Units Latest 1w k ago 1m ago 6m ago 12m ago
Fixed incom e
3m USD LIBOR % 0.30 0.30 0.30 0.53 0.25
Spread to OIS bp 12 12 13 34 10
2yr Treasury yield % 0.63 0.61 0.54 0.63 1.03
10yr Treasury yield % 3.36 3.30 3.15 3.00 3.85
10yr TIPS breakeven % 2.35 2.30 2.23 1.70 2.41
30yr mortgage rate % 4.86 4.86 4.46 4.58 5.14
30yr jumbo rate % 5.55 5.54 5.35 5.49 6.08
CDX.IG bp 75 78 83 116 79
AAA ABX Price 45.8 44.2 44.9 42.6 36.5
AAA CMBX Price 97.7 97.6 97.4 93.4 93.9
Equities
S&P 500 Index 1,270 1,258 1,224 1,060 1,142
Percent change since % -- 1.0 3.8 19.8 11.3
NASDAQ Index 2,681 2,653 2,598 2,159 2,300
Percent change since % -- 1.1 3.2 24.2 16.6
VIX index % 17.4 17.8 18.0 26.8 19.1
Foreign exchange
EUR $/€ 1.33 1.34 1.33 1.26 1.43
GBP $/₤ 1.56 1.56 1.58 1.52 1.59
JPY ¥/$ 82.0 81.1 83.0 87.2 93.3
Com m odities
WTI crude oil $/bl 89.4 89.8 88.7 74.1 82.7
Notes: Values are as of Thursday close; conventional mortgage rate is weekly figure from FHLMC;
Overnight indexed swap (OIS) rate is expected average Fed funds rate; ABX is index of subprime
RMBS credit default swaps; CMBX is index of CMBS credit default swaps; Sources: Bloomberg, Markit,
Bankrate.com, FHLMC, Federal Reserve and Haver Analytics.

Nomura Securities International Inc.

See Disclosure Appendix A1 for the Analyst Certification and Other Important Disclosures
Nomura | US Economic Weekly 02 December 2010

United States  Roundup David Resler

Finishing strong
A broad array of data indicates activity accelerated late in 2010 and the tax rate extension
compromise struck in early December should ensure that momentum carries into 2011.

The last two months Historians may look back on the fourth quarter of 2010 as a critical watershed in the transition
of 2010 brightened from a faltering recovery to a more secure and sustainable expansion. Developments over two
the outlook days in November, in particular, stand out. On 2 November, American voters signaled a
resounding dissatisfaction with the status quo and in the final tally, Republicans picked up some
67 seats in the House of Representatives and netted a seven-seat gain in the Senate. That
historical shift quickly altered the outlook for fiscal policy. The following day, the Federal Reserve
launched ―QE2,‖ the second phase of ―quantitative easing‖ in which the Federal Open Market
Committee announced that it planned to increase its securities holdings by some $600 billion by
the end of June 2011. In those two days, some of the darkest clouds overhanging the economic
outlook began to dissipate noticeably.
th
The electoral shift led The historical Congressional power shift began to affect fiscal policy even before the new 112
to a key fiscal policy Congress convened on 5 January 2011. Just before Christmas, the ―lame duck‖ Congress
compromise enacted a compromise tax policy that featured three key elements. (See: ―Grinch stopped in
time,‖ Global Weekly Economic Monitor, 10 December 2010). The centerpiece of the agreement
– an across-the-board, two-year extension of the tax rate structure that has been in effect since
2003 – removed the uncertainty about taxes that business had cited as a reason for caution
about investment and hiring. In exchange for his concession not to push for higher taxes on
upper-income earners, the president won a 13-month extension of the Emergency
Unemployment Compensation program. In addition, Mr. Obama agreed to terminate the ―Make
Work Pay Tax Credit‖ (MWPTC) in exchange for a temporary one-year two percentage point
(pp) reduction in the employee portion of the Social Security withholding tax. Although our earlier
baseline forecasts had assumed that Congress would adopt the first two elements of this
compromise, the unforeseen payroll tax holiday (and termination of the MWPTC) led us to raise
our real GDP growth forecast for 2011 by about 0.3pp but to lower it for 2012 by about 0.4pp.

Anticipation of policy Recent data suggest that the anticipation of a cut in payroll taxes and certainty about future tax
change helped spur rates may already be boosting activity. Indeed, even before the watershed events of November
Q4 growth and early December, retailers had enjoyed an encouraging rebound in sales growth. After a
spring time slump that featured back-to-back declines totaling 1.3% in May and June, retailers
have rung up a stretch of five solid month-on-month gains. Volatility in sales at automotive
dealerships and food service establishments has obscured an even more impressive revival at
other retailers where year-on-year growth has accelerated from a low of 4.9% in June to 7.1 in
November. As a result, sales at those establishments in November were the third highest on
record and are just 0.9% below the July 2008 peak (Figure 1). More recent reports, reflecting the
week-to-week performance of large national retailers suggest sales may have been even
stronger in December. The 52-week growth rates of the Redbook retail sales index averaged

Figure 1. Retail sales, excluding autos and food services Figure 2. Redbook retail sales index

% ch, y-o-y
$bn 3.7
4
280 274.3
275 271.9 1.6 1.9
2
270
265 0
260
255 -0.9
-2
250
245 -4
240
235 -6
230
Jun-08

Jun-09

Jun-10
Dec-07

Dec-08

Dec-09

Dec-10
Jan-06

Jan-07

Jan-08

Jan-09

Jan-10
Jul-06

Jul-07

Jul-08

Jul-09

Jul-10

Source: Census Bureau; Nomura Global Economics. Source: Redbook Research; Nomura Global Economics.

2
Nomura | US Economic Weekly 02 December 2010

3.7%, up from 3.2% in November and the strongest December since 1999 (Figure 2). Meanwhile,
US automakers reported that sales of cars and light trucks rose 2.5% in December to an annual
sales rate of 12.5 million units. Excepting the sales flurry during the short-lived ―cash for clunkers‖
program, December’s sales were the highest since September 2008. On the heels of strong
consumer spending in October and November, these signs of retail strength in December
suggest real consumer spending grew at rate of 4.1% (if not more) in the fourth quarter, the
fastest quarterly growth in nearly five years.

Winter storms cut If not for the paralyzing effects of the severe late December winter storm, sales might have been
into post-Christmas even stronger. But any purchases postponed during the blizzard now seem likely to occur in
sales January. Such an outcome would amplify a decade-long trend toward a larger share of holiday
season sales occurring in January. In part, this shift reflects the growing popularity of retail ―gift
cards.‖ Because deep price discounts typify the post-Christmas sales season, gift cards
effectively enable recipients to receive more than they would from traditional gifts. Though
typically purchased before Christmas, these cards only affect reported retail sales when they are
redeemed. A post holiday survey conducted by the International Council of Shopping Centers-
Goldman Sachs (ICSC-GS) indicated that about 14.5% of holiday purchases ―were in the form of
a gift card/certificate‖ but that the post-Christmas redemption rate has been slower than in
recent years. This suggests consumer spending could remain firm into the new year and may
get an extra lift from the cut in FICA tax withholding.

The fourth-quarter The rebound in retail activity since mid-year may have inspired a pick-up in other sectors as well.
upturn was broad- First evident in a wide array of regional surveys of businesses, the Institute for Supply
based Management (ISM) index of manufacturing activity index rose for a fourth straight month in
December. The 0.4 point December advance lifted the index to a seven-month high of 57.0,
comfortably above the 55.5 average reading during periods of economic expansion. Meanwhile,
the ISM’s index of non-manufacturing activity climbed an impressive 2.1 points in December.
That put the index at 57.1, its highest reading since May 2006 and virtually identical to the 57.0
reading on the ISM's manufacturing index (Figure 3). This was the first time that the non-
manufacturing index topped its manufacturing sector counterpart since June 2009 and offers
further evidence of broadening recovery.

We expect Q4 2010 Both ISM indices reflected similar developments in their key components as strength in orders
real GDP to top the accounted for much of the strength in each index. Orders are important indicators of future
previous peak growth in production and employment, and the manufacturing sector’s production index also
rose sharply in December. However, both the manufacturing and non-manufacturing
employment indices fell, suggesting the more encouraging fourth-quarter news has not yet
convinced businesses to increase staffing Still, both reports reinforce perceptions that the
economy may finally be entering a new phase of self-sustaining growth. Indeed, regression
analysis shows a strong statistical correlation between the ISM manufacturing index and real
GDP growth and implies that the December reading would be consistent with Q4 growth of
about 4.1%. While we judge that the overall data point to slightly slower growth of 3.5%, the
ISM-based forecast underscores the upside risks. But growth at our forecasted 3.5% rate would
be enough to complete the ―recovery‖ of the previous peak (Figure 4). From here, a true
expansion begins.

Figure 3. ISM manufacturing and non-manufacturing indices Figure 4. Real GDP relative to previous peak

Index $bn Forecast of Q4 2010

65
13400
Manufacturing
60
13300 Level of Q4 2007 peak
55
13200
50
13100
45 Non-manufacturing
40 13000

35 12900

30 12800
Sep-08

Sep-09

Sep-10
Nov-08

Nov-09

Nov-10
Jan-08

Jan-09

Jan-10
Jul-08

Jul-09

Jul-10
May-08

May-09

May-10
Mar-08

Mar-09

Mar-10

Jun-07

Jun-08

Jun-09

Jun-10
Mar-07

Mar-08

Mar-09

Mar-10
Sep-07
Dec-07

Sep-08
Dec-08

Sep-09
Dec-09

Sep-10
Dec-10

Source: Institute for Supply Management; Nomura. Source: Bureau of Economic Analysis; Nomura.

3
Nomura | US Economic Weekly 02 December 2010

United States  Economic Outlook David Resler  Zach Pandl  Aichi Amemiya

Firmer turf on the recovery road

The late-2010 pick-up in economic activity looks likely to carry into the first half of 2011, but
persistent headwinds should slow growth in the second half of the year.
Activity: Emerging from a mid-2010 ―soft-patch,‖ the US economy appears to have entered a
more secure phase of recovery. Nonetheless, powerful headwinds are likely to keep the pace of
growth in 2011 slower than is typical of economic recoveries. First, despite their breadth,
reforms of the health care and financial services industries have not diminished the uncertainty
about the timing and likely effects of their implementation. That uncertainty seems likely to
impede hiring and investment. Second, household deleveraging should restrain consumption
while the cumbersome legal process of foreclosing failed mortgages is likely to delay
stabilization of real estate prices. Third, state and local government budget pressures should
weigh on outlays and employment. Finally, while we see some improvement in housing, sales
volumes and home-building are likely to remain well below historical norms.
Inflation: We believe the four-year slide in core inflation will come to an end in 2011. Indeed, it
may have ended already as the y-o-y rate edged up in November from its record low reading in
October. Nonetheless, domestic fundamentals remain deflationary, with widespread spare
capacity across many sectors of the economy (for background, see our report Deflation: causes,
consequences and cures). On the other hand, the dollar has weakened, commodity prices
continue to climb, and rent inflation has started to turn (housing rent accounts for more than 31%
of the CPI). In addition, most measures of inflation expectations look stable.
Policy: The minutes of the December FOMC meeting show that the acceleration of economic
activity late in 2010 has not altered plans to implement the quantitative easing (QE2) program
announce in early November. We expect the Fed to complete this second round of quantitative
easing on schedule. The additional easing of monetary policy makes it unlikely that the FOMC
will begin raising its interest rate targets before 2013.The new Congress also seems intent on
limiting the scale and scope of federal spending, making any further fiscal stimulus unlikely.

Risks: Risks are roughly balanced. On the downside, we are concerned about a step down in
real estate prices and its impact on consumer spending and the financial system. Alternatively,
higher business confidence, fiscal stimulus and better financial conditions could boost growth.

Details of the forecast

% 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 2010 2011 2012
Real GDP 2.6 3.5 3.3 3.1 2.9 2.7 1.9 2.7 2.9 3.0 2.5
Personal consumption 2.4 4.1 3.6 3.0 2.7 2.7 1.4 2.5 1.8 3.2 2.3
Non residential fixed invest 10.0 1.2 3.9 7.9 8.6 8.4 7.0 6.2 5.3 6.5 6.8
Residential fixed invest -27.3 6.3 1.2 10.4 10.7 9.4 8.5 15.4 -2.8 2.6 10.6
Government expenditure 3.9 -0.9 -1.6 -1.6 -1.8 -3.2 -2.1 -1.7 1.1 -0.6 -2.0
Exports 6.7 8.0 8.0 7.0 6.1 7.5 7.5 7.6 11.7 7.4 7.4
Imports 16.8 -9.7 2.3 3.3 3.2 4.1 3.3 4.4 12.9 3.6 3.8
Contributions to GDP:
Domestic final sales 2.6 2.9 2.6 2.7 2.6 2.3 1.4 2.4 1.9 2.8 2.4
Inventories 1.7 -2.1 0.1 0.0 0.0 0.1 0.0 0.0 1.5 -0.1 0.0
Net trade -1.7 2.7 0.6 0.4 0.3 0.3 0.5 0.3 -0.5 0.3 0.1
Unemployment rate 9.6 9.7 9.7 9.4 9.2 9.0 8.9 8.8 9.7 9.3 8.7
Non-farm payrolls, 000 -73 125 150 175 200 200 200 200 87 181 219
Housing starts, 000 saar 589 549 610 658 685 713 756 793 589 667 799
Consumer prices 1.2 1.2 1.7 1.9 1.8 1.4 0.8 1.1 1.6 1.7 1.2
Core CPI 0.9 0.6 0.8 0.8 0.8 0.9 1.0 1.1 1.0 0.8 1.1
Federal budget (% GDP) -9.0 -8.5 -5.5
Current account balance (% GDP) -3.4 -3.6 -3.4
Fed securities portfolio ($trn) 2.04 2.16 2.54 2.64 2.64 2.64 2.64 2.54 2.16 2.64 2.34
Fed funds 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25
3-month LIBOR 0.29 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.75
TSY 2-year note 0.42 0.61 0.75 1.00 1.00 1.00 0.90 1.25 0.61 1.00 1.50
TSY 5-year note 1.26 2.01 2.00 2.50 2.25 2.25 2.00 2.25 2.01 2.25 2.75
TSY 10-year note 2.51 3.36 3.25 3.50 3.50 3.50 3.25 3.50 3.36 3.50 3.75
30-year mortgage 4.32 4.86 4.75 5.00 5.00 5.00 4.90 5.00 4.86 5.00 5.25
Notes: Quarterly real GDP and its contributions are seasonally adjusted annualized rates (saar). The unemployment rate is a quarterly
average as a percentage of the labor force. Nonfarm payrolls are average monthly change during the period. Inflation measures and
calendar year GDP are year-over-year percent changes. Interest rate forecasts are end of period. Housing starts are period averages.
Numbers in bold are actual values. Table reflects data available as of 6 January. Source: Nomura Global Economics.

4
Nomura | US Economic Weekly 02 December 2010

United States  Data Preview David Resler  Zach Pandl Aichi Amemiya

The week ahead

The retail sales and Beige Book reports should point to greater momentum in activity.

Chain-stores have Chain-store sales (Tuesday): Chain-stores generally reported solid holiday season sales,
reported solid sales although apparel stores and discount chains underperformed. Snowstorms appeared to have
little affect on sales in the last week of the month. For January, we will be looking for an
extension of these strong trends and watching gift card spending closely.

Wholesale inventories (Tuesday): Wholesale inventories have been on a tear, increasing at

an annualized rate of 22% over the last three months – the largest three month gain in the
history of the series. In our view, most of the recent increase reflects higher prices for the many
commodity products passed through wholesalers – oil, foodstuffs, metals, etc – rather than an
increase in real trade volumes. This month we look for another big increase of 1.5% m-o-m.

Mortgage applications (Wednesday): In a discouraging sign for the home sales outlook, the
nascent recovery in purchase applications has recently stalled. Unless the improving trend from
late November returns, we may need to lower some of our home sales forecasts.

We see limited import Import prices (Wednesday): We expect that import prices rose by 0.8% m-o-m in December or
price pass-through 0.4% ex-petroleum (Figure 1). High global commodity prices continue to feed through into the
prices of unfinished import goods. However, so far there has been little evidence of pass-
through from the relatively weak dollar into finished consumer goods prices – which matter most
for the US inflation outlook. We think this reflects structural factors, and should continue (see our
background report Pass-through primer for details).

Federal budget balance (Wednesday): We expect the Treasury to report a budget deficit of
$85bn for December, down slightly from last year because of improving tax revenues.

We expect an Beige Book (Wednesday): The December Beige Book noted that activity ―continued to
optimistic Beige improve‖, and hinted at a signs of acceleration in a few districts. Given the broad-based pickup
Book in activity over the last two months, we think this Beige Book is likely to sound considerably
more upbeat. This is supported by the recent FOMC minutes, which noted that the Fed’s
business contacts ―had become more optimistic about the outlook for sales and production‖. We
expect the report to indicate that the economy gained momentum during the period, and that
labor market conditions firmed. It will also be interesting to see if the Fed finds evidence of
higher commodity prices passing-through into retail goods prices.

Trade balance (Thursday): We expect that the trade balance widened slightly in November
after a sharp swing in October. However, we believe that the puzzling strength in imports in Q3
will continue to fade (see our US Roundup, 26 November 2010), and so we are forecasting only
a small deterioration. We expect that the nominal trade balanced widened to -$40.8bn from -
$38.1bn in October (Figure 2). Part of the increase in imports reflects price effects: import prices
rose strongly in November, which should boost nominal import figures.

Figure 1. Import prices Figure 2. Trade balance

% y-o-y $bn
10 0
8
-10
6
4 -20

2 -30
0
-40
-2
-4 All non-oil goods -50
-6
Consumer goods -60
-8
-10 -70
Jan-03 May-04 Sep-05 Jan-07 May-08 Sep-09 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10

Source: BLS. Source: Census Bureau.

5
Nomura | US Economic Weekly 02 December 2010

Producer Price Index (Thursday): We forecast that the Producer Price Index (PPI) rose by
0.9% m-o-m in December or 3.9% y-o-y. Finished energy prices in particular look to have
increased sharply during the month, but we expect that the food index was about unchanged.
We look for trend-like growth in the core PPI of 0.2% m-o-m, now that auto-related volatility has
passed. The pipeline inflation measures in the report will likely continue to show large gains due
to rising global commodity prices (Figure 3).

Retail sales should Retail sales (Friday): Most retailers reported healthy results for December, which suggests
grow strongly another potential increase in the Census Bureau’s measure of sales. However, retail sales
growth has been exceptionally strong in recent months – core retail sales increased an
annualized rate of 8.4% over the last three months – and these sudden spikes often reverse
(see Expect the unexpected). We therefore think core retail sales growth likely moderated to
0.2% m-o-m from 0.9% in November. For total retail sales, we look for an increase of 0.8%, or
0.7% excluding motor vehicle dealers.

Energy and food Consumer Price Index (Friday): We forecast that the Consumer Price Index (CPI) rose by
likely boosted the 0.5% m-o-m in December or 1.4% y-o-y (NSA Index: 218.9). Based on retail gasoline prices and
CPI energy futures, we forecast that the energy component rose by 4.6% m-o-m – the largest gain in
more than a year. We also look for a sizeable gain in food prices due to the sharp rise in food-
related commodity prices recently. In contrast, we expect that core CPI inflation cooled slightly.
We forecast a ―soft‖ 0.1% m-o-m increase, and think the year-over-year rate will retreat to 0.6%.
This forecast is based on the view that rent inflation will step back temporarily after accelerating
in November. Thereafter we see rent inflation moving higher – perhaps quickly.

Industrial production (Friday): We forecast that industrial production increased by 0.6% m-o-
m in December, up from 0.4% in November (Figure 4). The elevated level of the ISM production
index, rising motor vehicle production schedules, and a pickup in electrical output all point to
accelerating output. A 0.6% increase in production should lift the capacity utilization rate to
75.6%, the highest level since August 2008.

We see rising Consumer sentiment (Friday): The Index of Consumer Sentiment edged up to 74.5 in
consumer sentiment December, but we think it has further to rise. Strong stock prices, falling jobless claims and
generally improving news about the economy should support household confidence. In addition,
the tax compromise agreement reached between the White House and Congressional
Republications should lift the ―Opinions about government policy‖ index in the report, which is
closely correlated with the total index.

Business inventories (Friday): We forecast that business inventories increased by 1.0% m-o-
m in November, based on an already-reported gain of 0.8% in manufacturing inventories and
our forecast of a 1.5% rise in wholesale stocks. Despite this healthy growth, inventories look
likely to subtract more than 2 percentage points from Q4 GDP (because inventory growth will be
down from the third quarter).

Figure 3. Core crude PPI Figure 4. Industrial production

% y-o-y Index level

60 103
50 101
40
99
30
97
20
10 95
0 93
-10 91
-20
89
-30
87
-40
-50 85
Jan-03 Mar-04 May-05 Jul-06 Sep-07 Nov-08 Jan-10 Jan-03 Mar-04 May-05 Jul-06 Sep-07 Nov-08 Jan-10

Source: BLS. Source: Federal Reserve.

6
 Nomura | US Economic Weekly 02 December 2010

United States  Calendar

Nomura forecasts in italics
All figures in % except as noted All Times: EST

MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY

10-Jan 11-Jan 12-Jan 13-Jan 14-Jan
Chain Store Sales MBA - Mortgage Index Unemp. Insurance Claims Retail Sales
Week ICSC/GS Redbook (7:00am) (000s, 8:30 am) (8:30 am)
12/25 1.0 0.4 Total Purch. Refi. 12/25 391 Oct Nov Dec
1/1 0.4 0.4 12/24 461 201 2037 1/1 409 Total 1.7% 0.8% 0.8%
1/8 N.F. N.F. 12/31 472 200 2115 1/8 N.F. Ex. Auto 0.8% 1.2% 0.7%
Wholesale Trade 1/7 N.F. N.F. N.F. Producer Price Index Consumer Price Index
(10:00 am)
Import/Export Prices (8:30 am) (8:30am)
Sep Oct Nov (8:30 am) Oct Nov Dec Oct Nov Dec
Sales 0.5% 2.2% N.F.
Inventories 2.1% 1.9% 1.5% Oct Nov Dec Total 0.4% 0.8% 1.0% Total 0.2% 0.1% 0.1%
Ex. F&E -0.6% 0.3% 0.4% Ex. F&E 0.0% 0.1% 0.1%
Exports 0.8% 1.5% NF
Imports 1.0% 1.3% 0.8% Foreign Trade Balance Industrial Production
Imports* 0.3% 0.7% 0.4% (8:30am) (9:15 am)
*ex petroleum Sep Oct Nov Oct Nov Dec
U.S. Budget Statement Balance ($) -44.6 -38.7 -41.0 I.P. -0.2% 0.4% 0.4%
($Blns)(2:00pm) Exports (%) 0.5 3.2 N.F. Cap.Util.-% 74.9 75.2 75.5
Dec '09 Nov Dec
Imports (%) -0.7 -0.5 N.F. Business Sales & Invent.
(10:00am)
-91.4 -150.4 -85.0
Sep Oct Nov
FRB Beige Book Sales 0.8% 1.4% N.F.
(2:00pm) Inventories 1.3% 0.8% 0.7%
Michigan Survey-Prel.
(10:00am)
Nov Dec Jan
Sentiment 71.6 74.5 N.F.
Curr. Cond. 82.1 85.3 N.F.
___________________ ___________________ ___________________ ___________________ Expect. 64.8 67.5 N.F.
___________________
Announce 4-Wk Bills Auction 4-Wk Bills Auction 10-Yr. Notes Announce 3, 6mo Bills
Auction 3, 6mo Bills Auction 3-Yr. Notes Settle 4-Wk & 3,6mo Bills
Auction 30-Yr. Bonds
17-Jan 18-Jan 19-Jan 20-Jan 21-Jan
Empire State Index Chain Store Sales Unemp. Insurance Claims
(8:30 am) ( 8:30 am)
Nov Dec Jan MBA - Mortgage Index Index of Leading Indicators
(7:00am)
Holiday -11.1 10.6 5.0
(10:00am)
Housing Starts
Net For. Purch. - US Sec. (8:30 am)
Oct Nov Dec
(9:00 am) 0.4% 1.1% 1.3%
Oct Nov Dec
Sep Oct Nov Philadelphia Fed Survey
Total 77.2 27.6 N.F. Starts 534 555 570 (10:00am)
Markets closed Treasuries 78.9 23.5 N.F. %Ch. -11.1% 3.9% 2.7% Nov Dec Jan
Permits 552 544 570 Activity 22.5 24.3 15.0
Prices Pd. 34.0 51.2 33.0
%Ch. 0.9% -1.4% 4.8%
Existing Home Sales
(10:00 am)
Oct Nov Dec
(000's) 4430 4680 4570
___________________ ___________________ ___________________ %Ch. ___________________
-2.2% 5.6% -2.4% ___________________
Announce 4-Wk Bills Auction 4-Wk Bills Announce 3, 6mo Bills
Auction 3, 6mo Bills Settle 4-Wk & 3,6mo Bills
Auction 10-Yr. TIPs
24-Jan 25-Jan 26-Jan 27-Jan 28-Jan
Chain Store Sales MBA - Mortgage Index Unemp. Insurance Claims GDP

Case-Shiller HPI New Home Sales Pending Home Sales (NAR) Employment Cost Index

Consumer Confidence FOMC MEETING Durable Goods Orders Michigan Survey (Final)

___________________
Announce 4-Wk Bills
Auction 3, 6mo Bills
31-Jan
Pers. Income & Spending
FOMC MEETING
___________________
Auction 4-Wk Bills
Auction 2-Yr. Notes
1-Feb
Chain Store Sales
___________________
Auction 5-Yr. Notes
2-Feb
MBA - Mortgage Index
___________________ ___________________
Announce 3, 6mo Bills
Settle 4-Wk & 3,6mo Bills
Auction 7-Yr. Notes
3-Feb 4-Feb
Unemp. Insurance Claims Employment

Chicago Business Index ISM Manufacturing Index ADP- Nat'l Emp. Rpt. ISM Non-Mfg. Index

Construction Spending Manufacturing Orders

Vehicle Sales (M, saar) Non-farm Productivity

___________________ ___________________ ___________________ ___________________ ___________________
Announce 4-Wk Bills Auction 4-Wk Bills Announce 3, 6mo Bills
Auction 3, 6mo Bills Settle 4-Wk & 3,6mo Bills

7
 Nomura | US Economic Weekly 02 December 2010

United States  Week in Review

New data and revisions in BOLD

In %, except as noted All Times: EST
MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY
3-Jan 4-Jan 5-Jan 6-Jan 7-Jan
ISM Manufacturing Index Chain Store Sales MBA - Mortgage Index Unemp. Insurance Claims Employment
Oct Nov Dec Week ICSC/GS Redbook Total Purch. Refi. (000s) Oct Nov Dec
PMI 56.9 56.6 57.0 12/4 -2.1 0.6 12/3 604 211 2932 12/3 423 Payrolls 210 71 103
Prices 71.0 69.5 70.0 12/11 0.8 -0.1 12/10 590 200 2911 12/10 423 Mfg Payrolls -4 -8 10
12/18 1.7 0.1 12/17 480 195 2196 12/17 420 HrlyEarn.(%) 0.3 0.0 0.1
Construction Spending 12/25 1.0 0.4 12/24 461 201 2037 Avg. Hours 34.3 34.3 34.3
1/1 0.4 0.4 12/24 391
Sep Oct Nov 12/31 472 200 2115 12/31 409 Unemp. Rate 9.7 9.8 9.4
0.7% 0.7% 0.4%
Vehicle Sales (M, saar) ADP- Nat'l Emp. Rpt. Consumer Credit
Oct Nov Dec Oct Nov Dec Sep Oct Nov
Cars 3.7 3.8 3.7 Priv.Payrolls 82 92 297 Change, $b. 1.3 3.3 n/a
Trucks 5.4 5.3 5.3
Foreign 3.0 3.1 3.1
Total 12.2 12.3 12.5 ISM Non-Mfg. Index
Oct Nov Dec
54.3 55.0 54.5
Manufacturing Orders
Sep Oct Nov
Orders 3.0% -0.9% 1.1%
Shipments 0.7% 0.3% 0.9%
Inventories 1.1% 0.9% 0.4%

FOMC Minutes
(Aug 10 Meeting)

January 3: The ISM manufacturing index rose 0.4 points in December lifting the index level to a 7-month
high of 57.0. Construction activity continued to recover in November. Overall construction expenditures
rose by 0.4% m-o-m, slightly more than expected (Consensus: 0.2%).

January 4: The FOMC minutes indicated the committee saw an improvement in the US economic outlook at
its December 14 meeting. Factory orders rose by 0.7% m-o-m in November, well-above consensus
estimates but slightly below our forecast (Consensus: -0.1%; Nomura: +1.1%). Domestic vehicle sales rose
to a seasonally adjsuted annualized rate (saar) of 9.46 million uints in December (Consensus: 9.2m).
Weekly chain-store sales indexes show retailers recovered some of the sales lost due to blizzards in
previous weeks as a wave of favorable weather swept the US.

January 5: The ADP forecast for December nonfarm payroll employment was 297,000, nearly triple the
consensus forecast (Consensus: 100,000). We believe the large miss primarily reflects seasonal adjustment
distortions. Friday’s employment report confirmed this view. The Institute for Supply Management's (ISM)
non-manufacturing index climbed an impressive 2.1 points in December, and proved consistent with the
improvement in an array of survey-based economic indicators.

January 6: Initial jobless claims rose to 409k in the week ending 1 January, about as expected (Consensus:
408k). Claims dropped by 29k last week, and it is not unusual for claims to partially reverse large declines in
the following week.

January 7: Nonfarm payrolls increased by 103,000 in December, once again significantly less than
expected (Consensus: 150,000; Nomura: 165,000). However, upward revisions to the two previous months
added 70,000 workers to the total count so the level of employment in December was slightly higher than we
had expected.

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Nomura | US Economic Weekly 02 December 2010

Global Letter Paul Sheard

New Year’s stock take

Developments in the past month have been broadly in line with our global outlook for 2011.

It is one month now since we published our 2011 Global Economic Outlook. The first issue of
our Global Weekly Economic Monitor for 2011 provides a chance to take stock of our views.

Our theme for 2011 is Rocky Road of Recovery, by which we aimed to impart two messages.
First, and most basic, we expect the recovery in the global economy from the major financial
shocks of 2008 and almost free-fall recession of late 2008/early 2009 to continue. Our current
forecasts are for the global economy to grow by 4.4% in 2011 (weighted by purchasing power
parity), with ―developed world‖ economies growing by 2.4% and ―emerging market‖ (EM)
economies by 6.6%. The combination of the right global policy responses to the crisis and, aided
by time and positive potential growth, the self-corrective nature of recessions means that neither
the global economy nor any of its major constituent parts should go back into recession.

But our second message was that by no means do we expect the recovery to be a smooth one –
potholes and stumbling blocks abound. We summarized our outlook thus: ―Emerging markets
thrive, but risk mishandling rebalancing. Developed ones advance, but into post-crisis
headwinds. Now the twain must meet‖. At a macro level, the biggest challenge facing the post-
crisis global economy is to ―rebalance‖ current account, that is, net savings-investment,
balances that got seriously out of line in the boom times, while simultaneously maintaining
growth at, or restoring it to, potential. This is easier said than done. It requires a set of internal
(domestic policy) and external (exchange rate) adjustments that take time and can be hard to
forge consensus on either domestically or internationally, let alone implement smoothly.

One challenge for EM economies is the upward pressure from strong capital inflows on nominal
exchange rates. Given the differential growth rates and long-run convergence of living standards,
real exchange rates in developing economies should rise over time, with relatively low inflation
and an appreciating nominal exchange usually being the preferred mix. But short term, capital
flows can push up nominal and real exchange rates too far, too fast, leading policymakers to try
to stem the rise with foreign exchange intervention, by imposing capital or macro-prudential
controls, or by minimizing interest rate differentials through rate cuts or delayed hikes.

Too much resistance to upward pressures on nominal exchanges rates can lead to domestic
overheating and inflation, as the real exchange rate appreciation happens that way. That may
feel okay for a while as domestic economies boom but carries serious risks of bust and erosion
of policymaking credibility later on. See the Asia Roundup ―Taking stock‖, the EM Roundup
―Policy shifts highlight challenges‖, and three Special Topics, ―The case for capital controls IV:
more proliferation‖, ―Indonesia: Rising policy challenges‖, and ―Turkey: Postmodern policies to
continue‖ for our analysis on how this dynamic has been playing out over the past month.

Developed economies face their own set of crisis-aftermath challenges. In the US, we expect
the damage that the unwinding of the housing/credit bubbles has done to household balance
sheets to continue to be headwinds to growth in the form of debt de-leveraging and the housing
recovery being seriously delayed and muted. But we continue to give full marks to the Fed, dealt
a tough hand, for doing ―whatever it takes‖. The US economy is not booming, and we would not
expect it to, but the darker clouds have cleared. See the US Roundup ―Finishing strong‖ on that.

In the euro area, fiscal crisis rocks appear to be strewn all over the place, a result partly of
growing imbalances within the euro area that were hidden from view; see Europe Roundup
―Rebalancing the euro area‖. But our consistent view has been that European policymakers,
having received a rude wake-up call, would take the necessary monetary, fiscal and structural
reform steps to hold the euro area together and that ultimately Europe would emerge stronger
not weaker from this crisis. But the road will be a long one; see the Special Topic ―Spain and
Ireland: The housing market bust‖ on one dimension of why.

Japan’s macro problem is its secular deflation. But cyclically, and on the policy front, the news
recently continues to be more positive; see Japan Roundup ―Growth-oriented tax reforms and
FY11 budget‖. And even on deflation, there may be some light at the end of the tunnel; see
Special Topic ―Declining population could be inflationary factor‖.

It promises to be an interesting year. We pledge to keep you apprised of our views as it unfolds.

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Nomura | US Economic Weekly 02 December 2010

Global  Calendar

The Week at a Glance

Previous, Nomura, Consensus
Mon 10 Jan Tue 11 Jan Wed 12 Jan Thu 13 Jan Fri 14 Jan
US US US
Import prices (Dec) Trade balance (Nov) Retail sales (Dec)
% m-o-m 1.3, 0.8, 1.2 $bn -38.7, -40.8, -41.0 % m-o-m 0.8, 0.8, 0.8
North America

US US US
Fed Beige Book PPI (Dec) CPI (Dec)
% m-o-m 0.8, 0.9, 0.8 % m-o-m 0.1, 0.5, 0.4

US Industrial production
(Dec)
% m-o-m 0.4, 0.6, 0.4

France Industrial EU Rehn, Regling, France Euro area

production (Nov) Portugal Dos Santos HICP inflation (Dec) HICP ex-tobacco (Dec)
% m-o-m, sa -0.8, 1.0, 1.0 and EC Barroso speak % y-o-y 1.8, 2.0, 2.0 Index 110.3, 110.9, n.a.
Europe (ex-UK)

Italy Industrial Netherlands Industrial

production (Nov) production (Nov)
% m-o-m, sa -0.1, 0.1, n.a. % m-o-m, sa 0.4, 0.3, n.a.

Euro area Industrial ECB Governing Council

production (Nov) meeting (Jan)
% m-o-m, sa 0.6, 0.4, 0.5 % 1.00, 1.00, 1.00

Total trade balance Industrial production PPI output (Dec)

(Nov) (Nov) % y-o-y 3.9, n.a., 3.9
£mn -3946, -3740, -3800 % m-o-m, sa -0.2, 0.8, 0.5
UK

Global goods trade BoE MPC meeting (Jan) PPI input (Dec)
balance (Nov) % 0.50, 0.50, 0.50 % y-o-y 9.0, n.a., 10.4
£mn -8529, -8410, -8325

Holiday Economic coincident M2 (Dec) Machinery orders (Nov) CGPI (Dec)

(Coming-of-Age Day) index (Nov) % y-o-y 2.6, 2.5, n.a. % m-o-m -1.4, -2.6, n.a. % y-o-y 0.9, 1.0, n.a.
Index 100.8, 102.2, n.a.

Current account (Nov)

Japan

¥bn 1436.2, 1055.9, n.a.

Current economic
conditions (Dec)
Index 43.6, n.a., n.a.

China NZ Home building India Industrial Australia South Korea

Exports (Dec) permits (Nov) production (Nov) Unemployment rate (Dec) Export prices (Dec)
% y-o-y 34.9, 18.0, 23.3 % m-o-m -2.0, 3.0, n.a. % y-o-y 10.8, 5.3, n.a. % sa 5.2, 5.1, 5.1 % y-o-y 1.9, 3.0, n.a.
Asia

Malaysia Industrial Australia Thailand Central bank S. Korea Central bank India Wholesale price
production (Nov) Trade balance (Nov) meeting, repo rate (Jan) meeting, base rate (Jan) index (Dec)
% y-o-y 3.3, 2.8, 6.0 AU$bn 2.6, 2.7, 2.1 % 2.00, 2.25, 2.25 % 2.50, 2.50, 2.50 % y-o-y 7.5, 8.5, n.a.

Czech Republic Czech Republic Russia Chile Nominal overnight Hungary

CPI (Dec) Retail sales (Nov) Weekly CPI (Jan) rate target (Jan) CPI (Dec)
Emerging Markets

% y-o-y 2.0, 2.2, 2.2 % y-o-y -0.7, 1.8, 2.5 % w-o-w 0.3, 0.3, n.a. % 3.25, 3.25, 3.25 % y-o-y 4.2, 4.4, 4.4

Hungary Turkey Poland Israel

Central bank's minutes Current account (Nov) Current account (Nov) CPI (Dec)
US$bn -3.7, -5.9, n.a. €bn -1.2, -1.5, n.a. % y-o-y 2.3, 2.8, 2.6

Mexico IGAE monthly SA Manufacturing Poland Argentina

GDP proxy (Oct) production (Nov) CPI (Dec) CPI (Dec)
% y-o-y 5.0, 4.4, n.a. % y-o-y 2.5, 2.6, 2.7 % y-o-y 2.7, 2.9, n.a. % y-o-y 11.0, 10.8, n.a.

Note: EC=European Commission, NZ=New Zealand, SA=South Africa.

Sources for consensus forecasts: Bloomberg, Reuters.

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Nomura | US Economic Weekly 02 December 2010

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