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US economy, signs of hope?

Finance Blogger: Anthony Harrington Anthony Harrington

The challenges facing the US economy are so large and deep-seated that it is often difficult, in fact close to downright impossible, to believe that all may yet be well. Take a deficit of $1.5 trillion this year, unemployment above 10%, massive surplus capacity and a consumer market that is just not spending and you have all the ingredients for a disaster that could run and run. There are those who are predicting that another huge wave of housing foreclosures is just around the corner and that losses there could provide very bumpy going for America’s banks.

However, as Citizens Bank argues in its February 1 update on the US economy [PDF, 36K], there are positive signs emerging. Perhaps the most cheering of these, now that the figures for the fourth quarter 2009 are in, is the growth figure. The US economy grew at an annualized rate of 5.7% for Q4, a huge turnaround after so many quarters of severe retrenchment. The bad news, on the other hand, is that much of this growth, around 60% in fact, came from companies liquidating their inventories. That is a once-only play and is not growth in any meaningful sense, except for the fact that restocking after destocking is a hopeful sign that businesses expect to see an uplift in demand.

The big surprise in the quarter’s figures, Citizens Bank says, was a 13% (annualized) jump in business expenditure on equipment and software, both of which can mean that companies are spending aggressively where they can see efficiency gains. On the positive side too, is the fact that exports were up.

Not surprisingly, the general tone of Citizens Bank’s report is cautious. The main message is: “The US economy is headed in the right direction, but it’s too early to declare that the recovery is secure.” Consumer spending in the US accounts for some 70% of all spending in the economy, and it remains under severe pressure. House prices in the US have started to rise again, in some areas at least, and that is easing pressure on family budgets, but the net worth of US households is still $12 trillion down on its peak, according to the Bank.

Paul Kasriel, Chief Economist at Northern Trust and a contributor to QFINANCE writes a monthly commentary on the US economy and his analysis tracks reasonably well against Citizens Bank’s views. He points out that another bit of good news for US business is that inflation in January flattened somewhat after threatening to rise quite sharply through December. Although the Fed raised the discount rate slightly, that has no policy significance, he argues, and if the downward pressure on inflation continues the Fed should have no need to tighten monetary policy through 2010. “We are pushing our projection of the first Fed tightening out from August of this year to January of 2011,” he comments.

Kasriel points out that the US banking system is still contracting credit, so the near-term probability of a significant acceleration in the growth of final demand is low. In the 12 months ending January 2010, “real” bank credit contracted at an annualized rate of 6.1%. To find a rate as severe as this you have to go back to the Carter era and the imposition of credit controls in 1980. Another poor sign, he says, is that housing completions, which had stabilized (i.e. had stopped falling) earlier in 2009, have begun to resume their downward slide, while sales of new houses have weakened. None of this makes terribly jolly news but neither does it herald an out-and-out disaster. Instead Kasriel expects 2010 to deliver muted growth, nothing like the 5.7% bonanza experienced in Q4 2009.

Further reading on the US economy



Tags: Citizens Bank , economic recovery , GDP growth , inflation , Paul Kasriel , US
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