The US Economy, Which Way Next?

How to disentangle the upbeat from the downbeat reports on the US economy? We have had plenty of both in recent weeks and trying to make sense of the real state of the economy is a tough call. The analysis isn’t helped by the fact we are in a transitory stage with many stimulus measures such as support for the housing market having just finished which has had profound short term effects. Given more time, these may not look so bad but on a month by month change they look pretty dire.

On the plus side, manufacturing appears to be doing well. The private sector has been investing in plant and equipment again, partly out of a renewed confidence in the future and partly because they invested so little last year that investment plans are slipping well behind schedule and some plant and equipment needs replacing. A Wall Street Journal article details some major and minor investment plans for US corporations. Engine-maker Cummins Inc. plans to increase capital spending to $400 million this year, up nearly 30% from 2009. The company needs to meet increased demand fueled by rising sales of trucks and off-road engines in India and China, and an expected increase in demand for fuel-injection and emission-control systems that can meet new air-quality and fuel-efficiency standards. Meanwhile, Fedex is upping investment this year to $3.2bn from $2.8bn last year of which two thirds is earmarked for growth in their business and only one third to sustain current services. The shipping giant is buying new aircraft, bringing mothballed ones out of service and building new sorting facilities. Aircraft orders have distorted US figures in recent months, making some months look high and others low but non defense capital equipment orders excluding aircraft have risen steadily, up 2.1% from April to May and 18.4% above last year’s low base. And that is part of the problem. Year over year comparisons are against the biggest fall on record, unless the world had come to an end in 2009 this year was bound to be higher than last year. It makes more sense to look at month over month figures to see if growth is sustained and the general trend is upward.

What seems to have created the uncertainty is a combination of recent poor housing data coupled with concerns about the wider global economy. In the US growth has been downgraded slightly to 2.7% from earlier estimates of 3% for the first quarter 2010, but it was still the third consecutive quarter of growth and will almost certainly be followed by another quarter of growth for April to June. Although the IMF is forecasting in its latest World Economic Outlook that global economic growth will be at 4.2% for this year and 4.3% for next there is still a prevailing sense of fear over debt problems in Europe and a slowing of growth in China which is sapping confidence and giving rise to expectations for a double dip. Our expectation is China, India and other emerging markets will continue to grow strongly albeit at lower rates in the second half than the breakneck pace in late 2009 and early 2010. I believe the US market will also continue to expand. Employment is currently a worry with figures being distorted by the census but firms at least in the manufacturing sector are beginning to hire again. Not until employment levels improve and people feel confident about their jobs however will the housing market show consistent signs of recovery. Concerns about China are overblown. The country will have good months and bad but on the whole growth is being well managed. Provided that debt worries in Europe do not escalate over the summer the fear factor will retreat and confidence will return. So a lot is riding on the mandarins in Brussels and the markets reading of their handling of developments when put in those terms may be it’s not all clear sailing.

–Stuart Burns

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