Bank Of America On US Decoupling: Enjoy It While It Lasts

Tyler Durden's picture

Whether it is strong-USD-based forward revenue reductions for US corporations, rear-view mirror-based fuel-cost implicit tax-cuts, or unsustainable savings rate reductions, the recent US data has created a plethora of 'this time is different' decoupling theorists. We discussed David Rosenberg's perspective on this unsustainability last week and now his old employer (Bank of America) is notably out with a rather negative note on the chances of this 'local' European problem becoming a global issue and impacting US growth through both trade and financial linkages. In their view, we will see a steady deceleration in growth this year while the consensus sees a pick up and by the spring these negative revisions (from sell-side economists) will weigh heavily on stock markets and support bonds. They sum it up succinctly: 'Enjoy the recent price action while it lasts.'


BAML Economics: The odd decouple, Neil Dutta

Over the last several weeks, US economic data has almost uniformly surprised to the upside. The employment report is a case in point. In December payrolls rose by 200,000, the unemployment rate ticked lower, and the work week ticked higher. Against this firmer growth backdrop, we are marking to market our Q4 GDP forecast to 3.5% from an initial forecast of 3.0%. Roughly one-third of the growth contribution comes from inventories, which leaves final sales at 2.4%.

Moreover, we now expect legislators to stumble toward a full-year extension of the payroll tax cut and unemployment insurance, with only limited fiscal offsets. A temporary payroll tax cut is a relatively weak stimulus measure because only about a third is spent. Be that as it may, our original forecast assumed an expiration of both measures; we now see an extension of both. As a result, we are revising up Q1 to 2.2% from 1.8% and Q2 to 2.0% from 1.8%, but leave Q3 and Q4 unchanged at 1.3% and 1.0%, respectively. The confluence of these changes takes 2012 GDP to 2.1% from 1.9%.

With this less pessimistic forecast, we see the unemployment rate averaging 8.5% in Q4 2012, down from 8.8%. This level will still limit wage growth, and so we are leaving our inflation forecast untouched, looking for a drop to 1.5% YoY in core CPI by year-end from slightly above 2% now. Finally, the probability of QE3 gradually builds as growth drops to 1% in H2. Our “point estimate” is that they restart QE in September, slightly later than we initially thought.

Despite the near-term revisions, our longer-term view remains the same: we still see a steady deceleration in growth next year, while the consensus sees a pickup. We believe that the consensus continues to misread the lag pattern in the economy’s response to shocks. Europe is sliding slowly into recession and it will take time for that recession to dampen US data. The impacts of US fiscal tightening will also build over the year. And a significant post-election uncertainty shock awaits at year end, with the threat of major tax increases and major spending cuts, and more squabbling over the debt ceiling.

Hot topic: Europe’s crisis will hit the US with lag

In recent months the US economy has picked up, even as Europe has weakened and many forecasters expect this decoupling to widen further. In our view, the consensus is misreading the timing and underestimating the magnitude of the shock from Europe to the US. The consensus forecasts Europe contracting in Q1 with slow growth thereafter, but sees the US economy accelerating steadily over the course of the year. In contrast, we expect Europe’s crisis to have a lagged, longer lived impact on the US (Figure 1). This is one reason why we expect a steady deceleration in US growth in 2012. 


Historically, economic activity in Europe lags the US by roughly 2 to 3 quarters. Figure 2 illustrates the economic cycles in the US and Euro area. Economists generally attribute this phenomenon to a less flexibility in Europe’s economy, particularly in the labor market. When a global shock hits—such as a spike in oil prices—US firms are quicker to cut workers, causing a more immediate shock to income and a faster feedback loop between declining demand and incomes.


However, this cycle should be different. This time the shock is not global or US in origin, it is coming from Europe. Hence, it should take time first for Europe to slide into recession and then for the US economy to contract. We expect the consensus to ultimately come around to our second-half growth view for the US economy. By the spring, we expect these negative growth revisions from sell-side economists to weigh on the stock market and support bonds. Enjoy the recent price action while it lasts.

Europe has a local problem that can go global

Conventional wisdom holds that because of increased trade and openness between nations, business cycles across nations should be more synchronized.

Indeed, one reason for the synchronized global upturn has been the sharp recovery in global trade. However, that has generally not been the case. One reason national economies were less synchronized, at least until recently, is that global economic shocks had been smaller in the 1980s and 1990s than they were in the 1960s and 1970s. The absence of global shocks reduced volatility over time, allowing economic performance to be more differentiated across countries.

By extension, if nations were subject to more global shocks, then economic conditions across countries would be more synchronized. The nature of the shock matters. Historically, three kinds of shocks have driven the business cycle:

  • Regional shocks that have limited spillover to other countries. Examples include the European Exchange Rate Mechanism crisis in the early 1990s, the “Tequila crisis” of the mid 1990s, and the Asian crisis in the late 1990s. Each of these events sparked recessions in the regional economy with minimal spillover to the rest of the world.
  • Global shocks that impact many countries simultaneously. Oil production disruptions are a good example since every nation on earth consumes oil.
  • A regional shock that can go global. The US subprime crisis is the best example. The reason the crisis was so debilitating was because of the unique position of the US in the global capital markets and the heavy global exposure to toxic assets from the US.

In our view, the current crisis in Europe is an example of a local economic problem with a high risk of going global. While we do not expect the magnitude of this crisis to match the US financial crisis of 2008, we do think the transmission process will be similar – namely through confidence and trade.

Trade linkages are relatively easy to measure. Generally, what drives cross-country trade is a “gravity model”. This theory posits that countries closer in distance and similar in income levels tend to trade more with each other. The US is a fairly closed economy to begin with; exports are roughly 15% of GDP (mostly to Canada and Mexico) and exports to Europe are just under 15% of that. So, a 1% decline in Europe’s GDP would shave US GDP growth by 0.02pp.

The key linkage to US is through the financial market

The financial and confidence linkages are more important but also harder to measure. In 2008, global financial institutions posted large losses on US mortgage-backed securities. US bank exposure to European peripheral debt is low relative to the rest of the world. Instead, the principle risk to the US stems through the increase in risk aversion in the capital markets and corresponding tightening in interbank funding markets.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
GeneMarchbanks's picture

'In our view, the current crisis in Europe is an example of a local economic problem with a high risk of going global.'

It already has, turn-off the BBC and crunch some actual numbers....

economics1996's picture

Lets get this shit over with.

ACP's picture

No matter, Madman Bernanke is starting his nightly euro ramp as I write this.

You buy mine, then I'll buy yours is the trend from here to well, when everything falls apart.

I am Jobe's picture

Wow wee. Can we expect Booze ration cards administered by JPM?

e2thex's picture

Are there more dollars in circulation than bank eCONomists?



Sudden Debt's picture

This sovereign debt crisis isn't over at all.

Deficits keep growing at a faster pace and the recovering economy (with support of the spilling of government funds) is big enough to halt the deficits.


apberusdisvet's picture

"Europe lags the US by 2 or 3 Quarters"

This time might be the reverse, because US sheeple are far dumber than European sheeple.

Thadeous's picture

Thats why you have been disarmed for how long now.....?


Or was that just another "smart" move?

LawsofPhysics's picture

Total and complete bullshit.  This fuck wants you to believe that our financial ties to Europe are weak, seems to me like his own numbers indicate a 1:1 correlation.  If Europe defaults, then the U.S. defaults, period.  Someone else care to remind him what the CDS contracts are on all that european debt (both corporate and sovereign)?  Yeah right, and ALL the banks are solvent.  This article should come down ASAP.

ekm's picture

True that. Merryll Lynch couldn't predict their own collapse in 2008.

Mr Lennon Hendrix's picture

You as well as I know that these type of posts are put up here to show what the Banking Houses are saying.  It's info- take it or leave it.

peekcrackers's picture


well said as always .. plus 1

But the U S and E U have  defulted  .. I agree this post is very misleading


insolvent zombie  banks

non_anon's picture

we are indeed in historically shitty times

ekm's picture

One funny thing with Merryll Lynch, is that they're good at analyzing but they couldn't predict their own collapse in 2008 and got bought out by pure excrement called Bank of America.

disabledvet's picture

In others news "every financial clown on the planet suddenly discovers that Ben Bernanke really is a genius." h/t Jimmy Cramer. And "yes you can walk from that job anytime you want."

Mr Lennon Hendrix's picture

Everyone is bullish on financials except for....financials.

Bubbles_2.0's picture

USA has great future. Nat Gas powering business,auto's,commercial trucks.

LNG Exports will be another boon. The take down of nuclear power in Japan, Europe will drive this.

The eagles soars once again.


oogs66's picture

I bet Dave would deny bofa was his former employer - better a bankrupt Merrill association than what happened.

Eireann go Brach's picture

Isn't taking advice from anyone on the Titanic called BAC the same as taking sobriety tips from Lindsay Lohan?

Redneck Hippy's picture

My suspicion is that the U.S. is looking better BECAUSE Europe and China are going down the tubes.  All the money has to run somewhere.  America--the last stand of capitalism.

constitutionalist's picture

did u say capitalism and america in the same sentance?

Mr. Lucky's picture

Published US umemployment numbers are useless.  Look at the food stamp population numbers.

Boxed Merlot's picture

Look at the food stamp population numbers...


And who knows better about this than JP's morque?  Not much difference between them and the neighborhood drug dealer.  Both essential enterprises.

ebworthen's picture

The debit card sent to the unemployed in my state is administered by Chase bank (J.P. Morgue).  All sorts of juicy fees and penalties attached.

Snakeeyes's picture

Mr Lucky and Tyler, to this point look at chart of employment to population and The Fed Funds rate. There was a massive decoupling in 1982 and we just returned to 1982 in the employment measure.

See last chart.

AC_Doctor's picture

ECB is nearing their coordinated sovereign bond pruchase ceiling of 300 billion EURO's of Spanish, Italian, Greek and Irish bonds that are worth about 10 cents on the Euro.   No amount of printing will save this sinking ship and the  CDS trigger will be pulled by March on Greek debt.

ekm's picture

Extremely probable. That's the time slot allocated to attack Iran in my opinion.

Redneck Hippy's picture

Iran (and the oil companies) are making money on any turmoil caused by Iran.  The point is not to get attacked but to keep the price of Brent high.  Why should they be reasonable when they are paid so much not to be?

earleflorida's picture

historically is for loser. just ask darwin?

ebworthen's picture

They seem to be admitting that a lack of confidence in financials is warranted; albeit in a roundabout way.

brown_hornet's picture

Election year...QE before Sept.

kito's picture

youre soooo wrong. even the super dovish doves have now come out and said NO QE3!!!!!  enough of this qe talk already. like beating a dead horse............

GMadScientist's picture

They're sooooooo crafty with their setting of expectations now.

cranky-old-geezer's picture



Nonsense kito, QE is happening right now.  It's called "currency swaps".

GMadScientist's picture

BAC: "I can haz QE3?" <with appropriate confused dog look>

cranky-old-geezer's picture



Both EU and USA have the same problem, a hideous sovereign debt crisis with a failing economy.

USA can hang on longer because USA has the world reserve currency.

If EU had the world reserve currency, they could hang on longer.

People don't seem to understand how important WRC status is, allowing USA to export its inflation around the world.

These bankers talk like USD will keep WRC status forever, and we can keep exporting our inflation and fiscal mismanagement and growing government deficits and military imperialism forever.

These bankers don't seem to understand WRC status will end at some point.  They don't seem to understand how quickly USD will crash and USA will crash when it does happen.

None of these bankers foresaw the housing collapse, nor the collapse of Bear Stearns, AIG, Lehman, Countrywide, Merrill Lynch, and now MF Global. They were completely clueless. 

Don't expect them to foresee the end of USD world reserve currency status either.  They'll be completely clueless.

Don't expect them to foresee anything down the road.  Which is why reports like this are pure bullshit.

They're a bunch of clueless imcompetent morons ...running our financial system.