By Denny Gulino

WASHINGTON (MNI) – Nomura Friday became the first major firm to
formally anticipate a change in Fed policy as soon as August 10 to alter
course toward some renewed quantitative easing, arguing that without the
change, Fed policy is becoming less accommodative week by week.

“We think there will be something in the (FOMC) language that maybe
reverts back to the language of 2009, around the first time they made
this statement, that the Federal Reserve needs to maintain an expanded
balance sheet,” David Resler, chief North American economist for
Normura, told Market News International.

“That begs the question, what does that mean to expand,” he
continued. “We don’t think they will actively buy things,” he said, but
that they will have to “back up their language.”

While the Fed now is committed “only to rolling over guvvies,” he
said, “they are becoming less accommodative each week. Mortgages are not
being replaced” and other shrinkage is taking place.

“They need to have a strategy for preserving (the balance sheet’s)
size. Does that mean they will reinvest paydowns. I don’t know, and
we’re agnostic on how they will do it.”

Just lowering rates “is not on the table any more,” he said, and
changing the rate of interest on excess reserves “is the last option
they would resort to.” At present “they are losing assets, so I think
they would not want to lose them.”

Getting into the practical implementation issue, “do they offset
dollar for dollar every prepay they at the time they get it?” Resler
asked. “They may not be able to do that.”

In any event, the change in language, while having its own effect,
won’t be enough. There will have to be activity, he said.

Resler and colleague George Goncalves have dubbed whatever is to be
done “QE light,” with a risk of other actions, such as cutting the rate
on excess reserves.

Overall, the Fed must do something because of the deterioration in
the data since March and the downward revision in the Federal Open
Market Committee’s outlook, Resler said. Nomura does not see another
recession, but a sufficient case based on economic performance for some
manner of easing.

** Market News International Washington Bureau: 202-371-2121 **

[TOPICS: M$$CR$,M$U$$$,MMUFE$,MGU$$$,MFU$$$]

–White House’s Mid-Session Review Projects Large Deficits For Decade
–OMB’s Orszag: Must Cut Deficit, But ‘Foolish’ To Make Big Cuts Now
–CBO Report: U.S. Debt Could Grow To ‘Unsupportable Levels’
–CBO: Large Debt Would ‘Restrict’ Range of Policy Options For Economy

By John Shaw

WASHINGTON (MNI) – As lawmakers wind down their summer legislative
session, two recent fiscal reports show a dark fiscal landscape that
will require policymakers to respond.

The reports do not make for soothing beach reading.

Last Friday, White House budget director Peter Orszag released the
administration’s mid-session review. The report showed budget deficits
of $1.471 trillion in fiscal year 2010, $1.416 trillion in FY’11 and
$911 billion in FY’12.

The administration now projects deficits of $736 billion in FY’13,
$698 billion in FY’14, $762 billion in FY’15, $758 billion in FY’16,
$721 billion in FY’17, $749 billion in FY’18, $822 billion in FY’19 and
$900 trillion in FY’20.

Speaking this week at the Brookings Institution, Orszag said
serious deficit reduction steps are needed in the U.S., but added that
it would be “foolish to dramatically reduce the deficit immediately.”

Orszag urged policymakers to avoid the “false debate between jobs
and the deficit.” He said that sound economic policies require
short-term stimulus and longer-term deficit reduction.

“We need both and it’s all a question of timing,” Orszag said.

“Over the medium and long term, we’re on an unsustainable fiscal
path,” Orszag said.

The departing White House budget chief said that passage of
comprehensive health care reform this year has done a great deal to
tackle long-term deficits, but added “more needs to be done.”

Orszag said the work of the deficit reduction commission chaired by
former White House chief of staff Erskine Bowles and former senator Alan
Simpson will be a “critical kick start” to the fiscal debate next year.

The panel’s finding should help policymakers “get ahead of the
problem,” he said.

Orszag said that the U.S. is in “no immediate danger” of a loss of
global confidence in its ability to manage its fiscal affairs.

Orszag is stepping down Friday as White House budget director.

The day before Orszag’s remarks, the Congressional Budget Office
issued a paper, “The Federal Debt and Risk of a Fiscal Crisis,” that
focused on the gravity of the nation’s fiscal predicament.

The CBO paper said the recent surge in the federal debt is due to
the convergence of three factors: an imbalance in spending and revenues
that predates the recent recession and financial crisis; the sharp
reduction in revenues and surge in spending that “derive directly” from
the recession; and the cost of policy responses that were designed to
get the nation out of the recession.

The CBO said that the aging of the population and the rising costs
of health care will keep upward pressure on deficits unless policy
changes are made.

“Unless policymakers restrain the growth in spending, increase
revenues significantly as a share of GDP, or adopt some combination of
those two approaches, growing budget deficits will cause debt to rise to
unsupportable levels,” the report said.

The CBO report said rising debt levels would “increasingly restrict
the ability of policymakers to respond to unexpected challenges, such as
economic downturns or international crises.”

The CBO study warned that a rising level of public debt “would also
increase the probability of a sudden fiscal crisis” in which investors
could lose confidence in the government’s ability to manage its budget
and the government would thus lose its ability to borrow at affordable
interest rates.

The CBO report noted that any loss of investor confidence could
come gradually, but it could also occur, as recent international
examples show, “abruptly and interest rates on government debt would
rise sharply.”

If a fiscal crisis occurs in the U.S., “policy options for
responding to it would be limited and unattractive,” the CBO concludes.
The government would need to undertake some combination of restructuring
its debt, pursuing inflationary monetary policy, and implementing an
austerity program with spending cuts and tax increases.

** Market News International Washington Bureau: (202) 371-2121 **

[TOPICS: M$U$$$,MFU$$$,MCU$$$,M$$CR$,MGU$$$]

–Adds Details to Story Sent at 16:03 GMT

FRANKFURT (MNI) – The recovery of the Spanish economy will be weak
and fragile and growth is not foreseen until 2011, the IMF staff said
Friday in its annual article IV review on the country.

The challenges the country faces will likely retard recovery and
make it “more fragile” than in the Eurozone as a whole, the staff added.

“The central scenario is one of a long and gradual adjustment of
the various imbalances in the economy,” the staff wrote in their report,
dated at the end of June.

The staff foresee real GDP declining this year by 0.4%, after a
3.6% drop last year. Real growth should return in 2011, but only by a
meager 0.6%, the staff argued. In 2012 and 2013, growth is expected to
be 1.7% and 1.9% respectively.

Price pressures are also expected to remain subdued; the staff sees
inflation at below 1.5% through 2013.

The country’s public deficit, a serious problem, is expected to be
9.3% this year, 7.0% next year, 6.6% in 2012 and 5.9% in 2013. The
projections are more pessimistic than those of the Spanish government,
which aim to hit 3.0%, the maximum deficit allowed under EU rules, by
2013

“Ambitious fiscal consolidation is underway,” the staff said, but
the plan “is based on potentially optimistic macroeconomic projections
and the achievement of the targets should be made more credible.”

Government debt is expected at 63.7% this year and will rise to
79.8% by 2013 and then 85% by 2015, the staff said. The government sees,
however, debt only hitting 70.5% by 2013.

Spain’s outlook is “particularly uncertain,” the staff cautioned.
On the upside, “household consumption could grow more rapidly,
reflecting rising confidence, and stronger growth in partner countries
and the weaker euro may induce faster export growth,” the staff
explained.

Downside risks include a stagnation of the domestic economy, as
well as the failure to implement necessary fiscal policy reforms or an
external shock “such as an intensification in the recent market stress
for peripheral euro area countries,” the staff said.

“If distress were to spread to Spain, given its systemic
importance, the impact on the rest of Europe, and indeed globally, could
be substantial,” the report cautioned.

“Notably, the average conditional probabilities of distress in
European sovereign debt markets, given distress in Spanish government
debt, are higher than those under Greek distress,” it added.

Spain’s precarious situation and the risk that its wobbling poses
to other Eurozone countries make it necessary that the country “get
ahead of markets” with a “pro-active, comprehensive, and credible
strategy” on deficit-cutting and structural reform.

“A bold pension reform, along the lines originally proposed by the
government, should be quickly adopted,” the staff urged.

The new labor market reform does have “many positive aspects”,
but there remains “scope for further strengthening,” the staff argued.

“The process of consolidating savings banks has accelerated as
staff had recommended,” the report said.

The staff also eyed the minority status of the current ruling
Socialist government as a possible challenge, reminding that the
government’s austerity package was only approved by one vote in May.

–Frankfurt bureau; +49-69-720142; frankfurt@marketnews.com

[TOPICS: M$S$$$,M$X$$$,MFX$$$,M$$CR$,MGX$$$,MT$$$$]

FRANKFURT (MNI) – The recovery of the Spanish economy will be weak
and fragile and growth is not foreseen until 2011, the IMF staff
reported Friday in its annual article IV review on the country.

The challenges the country faces will likely retard recovery and
make it “more fragile” than in the Eurozone as a whole, the staff added.

“The central scenario is one of a long and gradual adjustment of
the various imbalances in the economy,” the staff wrote in their report,
dated at the end of June.

The staff foresee real GDP declining this year by 0.4%, after a
3.6% drop last year. Real growth should return in 2011, but only by a
meager 0.6%, the staff argued. In 2012 and 2013, growth is expected to
be 1.7% and 1.9% respectively.

Spain’s outlook is, however, “particularly uncertain,” the staff
warned. On the upside, “household consumption could grow more rapidly,
reflecting rising confidence, and stronger growth in partner countries
and the weaker euro may induce faster export growth,” the staff
explained.

Downside risks include a stagnation of the domestic economy, as
well as the failure to implement necessary fiscal policy reforms or an
external shock “such as an intensification in the recent market stress
for peripheral euro area countries,” the staff said.

“If distress were to spread to Spain, given its systemic
importance, the impact on the rest of Europe, and indeed globally, could
be substantial,” the report cautioned.

“Notably, the average conditional probabilities of distress in
European sovereign debt markets, given distress in Spanish government
debt, are higher than those under Greek distress,” it added.

The staff also eyed the minority status of the current ruling
Socialist government as a possible challenge, reminding that the
government’s austerity package was only approved by one vote in May.

–Frankfurt bureau; +49-69-720142; frankfurt@marketnews.com

[TOPICS: M$S$$$,M$X$$$,MFX$$$,M$$CR$,MGX$$$,MT$$$$]

By Theresa Sheehan

PRINCETON (SMRA) – The high point of the week ahead will be the
employment report Friday, but the overall sense of anticipation for
the week’s data is tame. The steady feed of reports over the week has
few standouts, and will mainly serve to flesh out what is already known.

Federal Reserve officials will be silent during the week as the
Federal Open Market Committee meeting approaches. Congress will be
finishing up before the summer recess starts August 9. The U.S.
Treasury’s quarterly refunding will be held on Wednesday. Earnings
season continues with a multitude of reports.

Combine the usual slow summer appearance schedule for Fed officials
with the traditional press blackout period in advance of an FOMC
meeting, and there is a very blank calendar indeed. It is likely to
remain so until after the annual Jackson Hole forum late in August.

There is a cluster of central bank meetings over the next two
weeks. The Reserve Bank of Australia August 3, the Bank of England
August 4 and 5, the ECB August 5, the Bank of Japan August 9 and 10, and
the Federal Reserve August 10. No change in policy or rates expected in
the near-term at any of these.

The July report on U.S. payrolls and unemployment Friday morning
promises to be a disappointment — similar to the June release. Then, a
modest increase in private payrolls was reported, along with a hefty
drop in government jobs due to an unwinding of the temporary Census
hiring, and a lower unemployment rate as the number of unemployed
dropped due to expiration of unemployment benefits. This should persist
into July.

Leading up to the employment data are a series of smaller reports.
The foremost of these is the ADP National Employment Report for July
Wednesday morning. This indicator can track the payroll data fairly well
in normal circumstances, but with the distortions from the Census hiring
and special factors causing swings weekly initial jobless claims, it has
been less useful of late.

The Challenger report on layoff intentions for July also Wednesday
morning could be a little higher, mainly due to increased job cutting in
government. There have also been some layoffs announced related to cost
cutting and consolidation in some industries. Nonetheless, the levels
are likely to remain low relative to the series history.

The Monster.com Employment Index is set for release in the early
hours of Thursday. Recently, it has shown some strength and offers the
prospect of continued improvement in the labor market, especially for
skilled workers.

Mid-morning Monday, the ISM releases its manufacturing index for
July, followed by the non-manufacturing index same time Wednesday. The
employment components of both will figure into last-minute adjustments
for expectations for the employment report. But both will also important
to markets for any sign that the factory or service sectors are showing
further softening.

Personal income and spending for June Tuesday morning should show a
further trend of modest gains in wages and salaries, and some increase
in consumer spending.

The last few reports associated with the housing market for June
will be released this week. The data on construction spending
mid-morning Monday will not have much new to say about private
residential building except for the calculation that shows spending on
renovations and repairs. Public spending will probably be slowing as the
fiscal stimulus monies continue to dwindle.

The NAR’s Pending Home Sales Index for June later Tuesday morning
should stabilize after plunging in May as the deadline had passed for
contracts to meet requirements in the homebuyer tax credit program.
However, the readings will be back to levels more consistent with a
stagnant housing market.

Sales of domestically produced motor vehicles in July will be
released on Monday as available. The units sold will probably be above
to the 8.4 million SAAR of June. Industry same-store sales comparisons
are scheduled for release on Thursday, and will probably be consistent
with consumer activity during hot weather with demand summer items, but
little for new fall merchandise.

Factory orders for June mid-morning Tuesday could be down for a
second month in a row, signaling some further softness in manufacturing.
The durable goods report for June was already reported down 1.0%, and
nondurables orders are likely to be about flat. However, it is possible
the durables component could be revised higher, and if so, will put a
better complexion on conditions in manufacturing.

Consumer credit outstanding for June published Friday afternoon is
mainly a footnote to the week. Consumers remain wary of taking on new
debt or adding to existing lines of credit, and lenders are cautious in
issuing any new loans.

The quarterly refunding announcement will take place on Wednesday
morning, to be preceded by the release of the quarterly borrowing
requirements on Monday afternoon. The refunding package will include new
3- and 10-year notes, and 30-year bonds, to be auctioned the subsequent
Tuesday, Wednesday, and Thursday, respectively.

A multitude of earnings reports are on the calendar, but fewer of
the big names are in the pack. Nonetheless, there are some notable
companies still to report.

Monday, the companies include BNP Paribas, Celadon Group,
Chesapeake Utilities, Fannie Mae, Freddie Mac, HSBC Holdings, Kaiser
Aluminum, and Sotheby’s.

Tuesday’s reports include Archer Daniels Midland, BMW, Clorox,
Coach, Dole Food, Duke Energy, Electronic Arts, Inland Real Estate,
Lear, Marathon Oil, MasterCard, OfficeMax, Pfizer, Pitney Bowes,
Priceline.com, Procter & Gamble, Dow Chemical, Unum Group, and Whole
Foods.

Wednesday, reports are expected from Hughes Communications, News
Corporation, Owens Corning, PG&E, PulteGroup, Societe Generale,
Allstate, Hanover Insurance Group, Time Warner, Toyota, and TRW Auto.

Thursday, the pace slows down but a number of major earnings
reports are expected including; Cigna, Ethan Allen, Hyatt Hotels, Kraft,
Novo Nordisk, Unilever, Viacom, and Walt Disney.

By Friday the number of reports are a comparative trickle, and
include Harleysville and The Washington Post Company.

** Stone & McCarthy Research Associates **

[TOPICS: M$$FI$,M$U$$$,MAUDS$]

PARIS (MNI) – The French government is too optimistic about the
strength of domestic economic growth ahead and must go further on fiscal
consolidation to meet its goal for a reduction in the public deficit to
3% of GDP by 2013, the International Monetary Fund said Friday.

France’s recovery is still “fragile”, the IMF said in its annual
Article IV review of economic and fiscal policy, highlighting the
downside risks from weak domestic and foreign demand and the
vulnerability of the banking system to any aggravation in the sovereign
debt crisis.

“The fragile recovery and possible spillovers from the European
sovereign debt crisis are now putting renewed stress on the financial
system,” the report noted. “As a result of the recession, asset quality
has worsened, and large exposures of the French financial system to
southern Europe have raised concerns about spillovers and contagion.”

While welcoming the government’s policy response to the recession
and its initiatives to stabilize the financial system, the IMF warned
that its assumption for a pick-up in GDP growth to 2.5% from 2011 onward
was too optimistic, forecasting instead 1.6% next year after a 1.4%
upturn this year.

“The same features of the French economy that partly shielded it
during the recession – large automatic stabilizers, high social
protection, and long-standing rigidities in labor and product markets –
are also likely to slow the pace of the recovery,” it said.

Moreover, risks to the economy are “slanted to the downside,” it
asserted. The recovery “is being tested … by weakening household
confidence and demand amid market concerns about sovereign risks in the
euro area,” it said.

The export rebound earlier this year may well prove short-lived,
given the moderate recovery of main trading partners and chronic
problems of competitiveness, “with the depreciation of the euro likely
to provide only limited relief,” the report said. Inflation is expected
to remain low at 1.3% this year and 1.6% next year.

“Although financial conditions have improved, credit growth remains
depressed,” the report noted. Despite the relative resilience of the
banking system, “asset quality has worsened and additional write-downs
on risky assets are likely.”

While debt yield spreads to German Bunds have so far remained
“moderate”, French banks have “relatively large” exposures to Greece,
Ireland, Italy, Portugal, and Spain that account for 7% of bank assets
and 30% of GDP, the report estimated. These exposures are largely in
private Italian and Spanish debt, while sovereign debt positions in
Greece are “small”, it said.

Thus, “the direct impact on French banks of the Greek debt crisis
is likely to be manageable,” the report assessed, pegging individual
banks exposures to Greece, Portugal, and Spain at 2-10% of equity,

“However, French banks remain vulnerable to spillovers,” it
cautioned. “Exposure to mature markets represented 83% of total foreign
claims in 2009, dominated by exposures to Belgium, Germany, the U.S.,
and the U.K. France would be vulnerable to spillovers from these
countries too if they were to be affected in the first place, which
would significantly weaken the capital and liquidity position of the
banks.”

The IMF welcomed a shift in government policy focus to fiscal
consolidation, but underscored the need for further measures in order to
hit deficit targets. On the basis of its own growth assumptions, it
projected the public deficit at around 4% of GDP in 2013 without
additional efforts.

“Unless a substantial fiscal consolidation is undertaken, the debt
is bound to further increase over the medium term (including as a result
of population aging), thereby threatening the sustainability of public
finances,” the report warned.

“Under current policies, the primary balance is set to remain in
deficit through 2014 and, as a result, the debt ratio could climb more
than 25 percentage points above its pre-crisis level, reaching 90% of
GDP over the medium term,” it said. In case of “adverse shocks” it could
top 110%.

The economic crisis has cost France a “permanent loss” of about
3.5% of potential output, the report estimated. Potential growth over
the medium-term is likely to be around half a point below that of the
past decade due to the “sharp contraction of investment and the
resulting slowdown in capital accumulation, a rise in structural
unemployment, and a possible temporary reduction in allocative
efficiency that could lower total factor productivity growth.”

–Paris newsroom +331 4271 5540; e-mail: stephen@marketnews.com

[TOPICS: M$F$$$,M$X$$$,MFX$$$,M$$CR$,MGX$$$,MT$$$$]

By Brai Odion-Esene

WASHINGTON (MNI) – U.S. consumer sentiment rose in July according
to the final reading of the Reuters/University of Michigan Consumer
Sentiment data released Friday.

The index came in at 67.8 vs. July’s preliminary reading of 66.5.

The index’s preliminary number for current conditions came in at
76.5 for July vs. 75.5 earlier in the month and expectations rose to
62.3 vs. 60.6 reported initially.

Consumers’ updated 1-year inflation expectations came in at 2.7%
compared to July’s preliminary expectation of 2.9%. Five-year inflation
expectations were 2.9% vs. July’s early reading of 2.9%.

The median forecast in the Market News International survey of
economists was for the index to rise half a point to 67.0, consistent
with a mixed bag of economic reports — modest improvement in some
sectors, slowing activity in others.

The advance estimate of U.S. Q2 GDP revealed growth of 2.4%, close
to the MNI consensus forecast of 2.5%. The downside move, from +3.7% in
Q1, was due to a smaller positive contribution from consumer spending
which rose 1.6% in Q2, reflecting just a 0.8% rise in services
consumption.

Federal Reserve Chairman Ben Bernanke described the U.S. economic
outlook as “unusually uncertain” in recent Congressional testimony,
while in its latest survey of economic conditions around the country —
the “Beige Book” — the Fed said only eight Districts reported stronger
activity, with “a number” of them describing the increase as “modest.”

This compared with the June findings that showed activity improved
in all 12 Districts.

Similar to Friday’s U.S. consumer sentiment data, the European
Commission Thursday, as part of its report on EMU economic morale, said
consumer sentiment rose another three points in July after a one-point
upturn in June to stand just one point below the long-term average.

The gain reflected mainly a higher assessment of recent economic
activity (+6) and prospects for the year ahead (+6), which had eroded
sharply with the intensification of the sovereign debt crisis in May.

Preliminary consumer sentiment index data for August will be
released August 13.

** Market News International Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MAUDS$]

WASHINGTON (MNI) – St. Louis Federal Reserve President James
Bullard said Friday the central bank must have a plan in place to
conduct “significant” quantitative easing should the U.S. economy
experience another negative shock.

In the event of a shock and if inflation moves lower, the country
could find itself “in a really sticky situation,” he warned

Quantitative easing will work to get inflation and inflation
expectations higher, Bullard said in an interview on business channel
CNBC, noting the Bank of England has done a better job adjusting its
quantitative easing program to deal with shocks to the UK economy.

While the Fed conducted a large scale one-off quantitative easing
policy, he said, the BOE’s Monetary Policy Committee has made
adjustments as events change.

Although Bullard stressed he does not believe deflation is the main
economic scenario in front of the U.S., “it is a risk,” noting the
chances of deflation “has risen a little bit.”

Bullard said he remains an inflation hawk, but the U.S. is close to
Japan-style situation. “If we do get into that, it will be very
difficult to get out.”

The Fed must think about what it will do if the U.S. economy gets
further negative shocks, he said, arguing the central bank needs to have
a plan for “significant easing” if the situation arises.

“I don’t think we can sit here and say, ‘for sure this will all go
away,’ and ‘for sure inflation will start to drift higher’.”

But Bullard said if the economy continues to grow in the second
half of the year, then there will be nothing to worry about.

“But that’s not the nature of contingency planning,” he continued.
“You have to be ready for the opposite case.”

Bullard pointed out that many academics agree that when inflation
gets below a certain point, the Fed has to switch to a different policy
other than interest rate targeting.

“If we promise to stay at zero (rates) for 10 years, it’s going to
be Japan,” he warned.

In his much-discussed research paper published Thursday, Bullard
examined the risk of deflation to the U.S., warning that during the
recovery, the U.S. economy is susceptible to negative shocks which may
dampen inflation expectations.

“This could possibly push the economy into an unintended, low
nominal interest rate steady state,” Bullard wrote, “Escape from such an
outcome is problematic.”

He said the higher risk of deflation is in part due to the interest
rate policy being pursued by the Federal Open Market Committee. Current
policy is to keep interest rates close to zero for an extended period of
time.

Under current policy, Bullard said the reaction to a negative shock
is perceived to be a promise to stay low for longer, which may be
counterproductive because it may encourage a permanent, low nominal
interest rate outcome.

“A better policy response to a negative shock is to expand the
quantitative easing program through the purchase of Treasury
securities,” he said.

** Market News International Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$,M$$CR$]

WASHINGTON (MNI) – There were 10,000 U.S. workers counted on strike
in the July employment report reference period, the Bureau of Labor
Statistics reported Friday.

The strike was in the construction industry in the Chicago area.

** Market News International Washington Bureau 202-371-2121 **

[TOPICS: MAUDS$,M$U$$$]

–2009 GDP Revised Down To -2.6% From Previous -2.4%
–Downward Revisions To 3Q’09, 4Q’09; 1Q’09 Revised Up
–PCE Revised Down In All Four Quarters In 2009 Due To Services
–Larger GDP Decline In Recent Years Shifted To 4Q’08 From 1Q’09

By Kevin Kastner

WASHINGTON (MNI) – Armed with updated source data, the Bureau of
Economic Analysis Friday released revised estimates for U.S. economic
growth that indicate the deterioration in GDP in 2009 was slightly
larger than previously estimated and followed downward revisions to
growth in 2007 and 2008.

In 2009, the annual rate of decline in GDP was revised down to 2.6%
from the 2.4% drop originally estimated, with growth in the final two
quarters of the year revised down. However, the decline in first quarter
of 2009 revised up to a smaller, but still substantial, drop.

On a Q4/Q4 basis, GDP is now reported up 0.2% in 2009, an upward
adjustment from the originally published 0.1% gain, though that is due
in large part to a downward revision in the fourth quarter of 2008.

The key factors in the revision in 2009 were downward adjustments
to consumption, particularly services, and private inventory investment.

The revisions are being released to coincide with the announcement
of the revised first-quarter and advance second-quarter GDP data for
2010.

The reading for fourth quarter 2009 GDP was revised down to a 5.0%
gain from the previously reported 5.6% rise. The reading for third
quarter GDP was revised down to a 1.6% rise from the previously reported
2.2% gain.

The reading for second quarter 2009 GDP was unrevised at a 0.7%
decline, while the reading for first quarter GDP was revised up to a
4.9% decline from the previously reported 6.4% plunge.

Interestingly, the reading for the fourth quarter of 2008 was
revised down to a 6.8% drop from the previously reported 5.4%, and is
now the largest drop in the current contraction period due to the upward
revision in the first quarter of 2009.

As a result, the largest drop in recent years now appears to have
been a quarter earlier than previously reported. However, the pattern of
contraction through 2008 and the first half of 2009 remains intact.
Likewise, the gains in the last half of 2009 were smaller, but still
positive.

For the revision period of 2007, 2008, and 2009 combined, growth
was revised down to a 0.2% decline at an annual rate from the previously
reported flat reading over that period. For the period of contraction
that began in the first quarter of 2008 and ran through the second
quarter of 2009, growth was revised down to a 2.8% annual rate drop from
the previously reported 2.5% decline.

BEA noted that when the contraction period is not annualized, but
rather reported as the actual drop over the six quarter period, GDP fell
4.1%, the largest such contraction in the post-war period.

GDP growth was revised down in both 2007 and 2008. For 2008, GDP
growth was revised down to a flat reading from the previously reported
0.4% gain. Downward adjustments to nonresidential fixed investment and
private inventory investment were the key factors that year.

Growth in 2007 was revised down slightly to a 1.9% annual rate from
the previously reported 2.1% rate. Downward adjustments to consumption
and government spending, and an upward revision to imports were the key
factors in the revision to 2007 growth.

Final sales growth was revised down in all three years, as was
current dollar GDP growth.

The chain price index was revised down in 2009, but was adjusted
upward slightly in 2008 and was unrevised in 2007. The closely watched
core PCE price index was unrevised in 2009 and 2007, and revised down
slightly in 2008.

PCE was revised down in 2009 and now stands at a 1.2% decline,
compared with the 0.6% decline previously reported. PCE was revised down
in 2007 and 2008 as well, and in all four quarters of 2009.

The key revision to 2009 PCE was in services, which was revised
down in all four quarters. For 2009 as a whole, services PCE was revised
down to a 0.8% decline from the previously reported 0.1% gain. Goods PCE
was revised down slightly for 2009 to a 2.0% decline from the previously
reported 1.9% decline.

Starting in the first quarter of 2010, BEA now incorporates the
Quarterly Services Survey produced by the Census Bureau into their
quarterly estimates for services PCE for health care and a number of
other sectors. These data were not used for 2009 and before, and so did
not affect revisions prior to 2010.

Residential investment was revised down in all three years.
Residential investment was revised actually up to smaller declines in
the first two quarter of 2009, but was revised down in the last two
quarters, including a 0.8% decline in the fourth quarter from the
previously reported 3.8% rise.

Nonresidential investment was revised up in 2007 and 2009, but
revised down in 2008. For 2009, nonresidential investment was revised up
in the first three quarters, but was revised down sharply in the fourth
quarter to a 1.4% decline.

Private inventory growth was revised down in 2008 and 2009, but
revised up in 2007. Inventory growth was revised down in three quarters
of 2009, but was revised up to a smaller decline in the fourth quarter.

The net exports gap were revised was revised wider in each of the
three years and in each of the first three quarters of 2009. The net
export gap was slightly narrower in the fourth quarter than previously
reported.

Government purchases were revised down in each of the last three
years and in all four of the quarters in 2009.

On the income side, personal income was revised up in each of the
last three years, led each year but upward adjustments to personal
dividend income.

Because the revision to personal taxes were much smaller than the
revisions to personal income, the revisions to disposable personal
income were roughly in line with those in personal income.

The personal savings rate was revised sharply in each of the last
of three years. The 2009 savings rate now stands at 5.9%, up from the
4.2% previous estimate. The savings rate was also revised up in each of
the 12 quarters open to revision.

The level of pre-tax corporate profits from current production was
revised down in each of the last three years, though the percent change
for 2009 was revised up slightly due to the very large downward
adjustment to 2008.

** Market News International Washington Bureau: 202-371-2121 **

[TOPICS: MAUDS$,MT$$$$,M$U$$$,MAUDR$]

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