According to the Beige Book issued by The Federal Reserve and covering the period of time from September 1st to October12, recovery has now spread to the whole of the US economy. It is nonetheless still fragile, with the strongest improvement in two sectors. Midscale and low-end house sales picked up thanks to tax allowances for first-time buyers, supporting activity in the residential property sector. Meanwhile, manufacturing improved thanks to the end of the cycle of inventory reductions. Remember that manufacturing increased by 0.9% m/m in September and by 1.7% q/q in Q3, supported mainly by the continuing rebound in automotive production (up 8.1% m/m). However, job market conditions are still mixed and this surely likely to weigh on household consumption. Against this backdrop, pricing pressures are contained, with no major risk of deflation. The publication of the Q3 national accounts, due on 29 October, should confirm the Fed's diagnosis and show growth in GDP for the first time in more than a year. On our estimates, quarterly growth should stand between 2.5% and 3% on an annualised basis, driven mainly by the rebound in consumer spending, despite households' efforts to reduce their debt and the abolition of the scrapping premium in September (car sales fell by more than 10% m/m but rose by 21.4% q/q on an annualised basis in Q3). In the UK, the minutes of the Monetary Policy Committee meeting of 7 and 8 October, published on Wednesday, helped to support expectations that non-conventional measures will be abandoned in the near future. As a matter of fact, the MPC voted unanimously to maintain the asset purchase programme ceiling to GBP 175 Bn as well as the Bank rate to its current levels. In addition, Governor Mervin King stated the same day that "at some point interest rates will return to more normal levels". However, the Monetary Policy Committee will not make any such decisions without being assured of a lasting recovery. This depends primarily on households' desire to continue to build up their savings, in view of the expected decline in incomes and the expected rise in taxes, in a climate in which their financial wealth has waned and the prospect of a change in the unemployment situation is still grey. The Q2 national accounts (final estimate of -0.6% q/q in Q2, following -2.5% in Q1, the sharpest fall since September 1979) and full-year revisions by the ONS show that the recession was more profound than expected. Year-on-year, GDP contracted by a record 5.5% in Q2 (quarterly figures available since 1955). Recession went on in Q3, though decelerating as GDP declined by 0.4% q/q according to its preliminary estimate, after -0.6% in Q2 09. These results are disappointing, as a slight upturn in Q3 was expected. In addition the decline in output was due to decreases in the four main component aggregate series, even in services while surveys had pointed to a small upturn. Nonetheless, these results confirm that the worst of the recession is behind us. Recent survey data in both manufacturing sector and services indicate that recovery is near but that it is likely to be very gradual. Consequently overall GDP is likely to contract by around 5% for the year, the sharpest drop since 1955, before rebounding modestly newt year.

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