From: US GIO To: Undisclosed recipients:; Subject: Macro Skinny: The S&P as a policy tool, revisited Date: Tue, 09 Apr 2013 14:46:49 +0000 Attachments: 2013-04-09_S&P_as_a_policy_tool,_revisited.pdf I nline-Images: image003.png; image004.png; image005.png; image006.png; image007.png; image009.png; image010.png; image0ll.png; image012.jpg; image00 Ljpg Macro Skinny J.P Morgan April 9, 2013 The S&P as a policy tool, revisited Fiscal drag: it's here, but not here to stay. With all of the uncertainty surrounding the fiscal cliff last year, no one thought first quarter growth in the US would exceed 3%. It's now quite likely, but context is critical. Growth in the fourth quarter was dragged down by a sharp inventory de-stocking and a sudden drop in defense spending (both could be related to the fiscal cliff). The rebound in Q1 hence reflects a one-time positive payback. The story is different for Q2: it is broadly anticipated that the drag from the payroll tax and sequester will finally take effect and push sequential growth to below 2% (weaker growth signs are already seen in the March data). However, looking to the second half of the year, the fiscal drag should fade and growth will likely gradually accelerate. Excluding the inventory noise, the underlying growth picture looks more like 2-2.5% for 2013, better than the 1.5-2.0% we penciled coming into the year. The weak March jobs report tells us the labor market will likely see a bumpy ride as well. Only 88k jobs were added in March, but the trend is still within our expectations of 150-175k per month this year (right chart). Put in the context of healthy hiring months recently and tightened fiscal policy, the broader trend is still encouraging. Looking through the noise, US growth ranging 2.0-2.5% Contributions to QoQ annualized% mange in real GDP, ppb 5 4 Real GDP 3 2 0 -1 -2 -3 forecasts ■Inventones ■National defense ■Rest of the economy 12:O1 12:O2 12:O3 12:O4 13:O1 13:O2 13