First signs of self-sustaining growth in the US

The efforts to put the US economy back on the rails have yet to bear fruit and this is having an impact on global growth. Although the US economy has staged a strong recovery since mid-2009 on the back of unprecedented economic policy measures, the motors of growth that are required to foster a genuinely self-sustaining recovery have yet to take over and provide better visibility for investors.

The global economy came out of recession almost two years ago, thanks to concerted budgetary and monetary action taken by the world’s largest economies. The US economy in particular went from shrinking at an annual rate of almost 5% in the first quarter of 2009 to expanding by almost 5% in the fourth quarter of the same year.

In spite of this upturn, the gloom lingering over some key sectors of the economy prompted the political and monetary authorities in the US to implement two packages designed to stimulate the economy towards the end of 2010. First, the Federal Reserve rolled out a second programme to repurchase sovereign debt on the secondary market (QE2), widely referred to as quantitative easing. Second, Congress voted to approve a raft of budgetary measures which extended the tax cuts introduced by the Bush Administration. As a result of these measures, economists raised their average forecast for US growth in 2011 to 3.5% from 2.8% previously. At the same time, the IMF revised its estimate for global growth to 4.4% from 4.2% previously.

The estimated growth rate for the US economy in 2011 is well above its long-term potential growth of around 3%. However, the crucial date to determine whether the global economy is able to continue to grow unassisted will come in June. This is when the Federal Reserve will end its sovereign debt repurchasing programme, which amounts to almost $100 billion per month.

Without the support provided by the Obama administration’s economic policy, the US economy would rapidly run out of steam. The nature of US growth must change over the coming months, from being artificially induced to becoming self-sustaining. If this is to happen, signs of a recovery will be needed in two crucial areas, namely employment and lending.

Let us look first at the lending cycle. Household borrowing has stabilised close to the long-term historical average, which suggests that the cycle of household deleveraging is nearing an end. Encouragingly, there appears to have been a rise in consumer lending since the end of 2010. The only downside is mortgage lending, which is still extremely weak owing to a lifeless housing market.

On the employment front, the recovery has been underway since March 2009, with 30,000 jobs created on average each month. However, the figure is weak, especially if we consider that between 200,000 and 250,000 new jobs are created each month during a normal recovery. Moreover, when we bear in mind that 8.8 million jobs were lost over the 18 months from mid-2008, the current upturn in job creation cannot be qualified as anything other than modest. Investors will have to keep a close watch on the employment situation, as household income, which depends mainly on employment, has a direct impact on consumer spending which in turn accounts for 70% of GDP.

On balance, most of the signs are encouraging though, and continue to suggest that a sustainable recovery is on the cards. Most significant among these are the positive consumer confidence and purchasing manager index readings, as well as the good retail sales figures. These trends are expected to be among the factors that promote job creation, an upturn in lending and a housing market recovery. Nevertheless, the US economy’s transition to a system that relies on sustainable growth catalysts will pose a major risk factor for investors over the months ahead.

Added to this, an unexpected geopolitical threat has suddenly reared its head. If the democracy movements that have led to unrest in North Africa and the Middle East were to spread through the region and to large oil-producing countries such as Saudi Arabia, they would push the price of oil higher over a prolonged period. This would pose a lasting threat to the scenario of a virtuous cycle of recovery in US growth. Furthermore, developed countries’ diminished purchasing power would have a negative effect on growth, while inflation would continue to present a serious challenge for emerging countries.

Whatever happens, the fact remains that investors face numerous risk factors. Investors will have to make tactical choices over the coming months to address these factors as and when they arise.