The rather fractious political posturing in the United States during the last 12 months has caught the headlines and has diverted attention from the fact that the American economy is starting to look a great deal healthier.
Whether this is the result of US economic policy, or in spite of it, is the subject of debate. However, the evidence does suggest that the combination of Government bailouts (to the bank and automotive sectors particularly), extended tax breaks, low interest rates and quantitative easing has proved to be an effective remedy.
There are some who might argue the UK economy would benefit from a little less austerity and a little more expansionary policy. Sadly, what the US is able to afford to get away with (by financial markets) in terms of debasing its currency is very different to what is possible in this country.
The US economy (as measured by GDP) is now predicted to grow by over 2 per cent in 2012. This compares very favourably with the prediction for the Eurozone (a contraction of 0.6 per cent) and the UK (growth of 0.8 per cent).
There are many favourable indicators and here are a few highlights:
The Federal Reserve has indicated that interest rates will not rise until at least the end of 2014. This encourages consumers to spend and businesses to invest. Retail sales are increasing and this indicates rising consumer confidence. New orders are increasing in both the services and manufacturing sectors. This indicates rising confidence that will support further consumption and investment. Household and corporate debt has greatly reduced and this makes the economic recovery less vulnerable when interest rates finally start to rise.
Exports are booming. Encouraged by a deliberate policy of dollar weakness, this helps to rebalance the global economy. The stock of unsold houses is reducing and confidence in the house-building sector is recovering. This will improve consumer confidence.
The extraction of shale gas is reducing the dependence on oil and boosting the petrochemical industry. This will partially alleviate the negative economic impact of a steep rise in oil prices – although such a rise would nevertheless prove a problem. And finally, US banks recently passed a relatively robust stress test by the Federal Reserve, and are clearly much better capitalised than their European counterparts. They have also actively begun buying back their own shares. Better capitalised banks are able to lend more to businesses seeking to invest. This will contribute to future economic growth.
The US economy is still a long way from functioning ‘normally’ but, as the largest economy in the world, its improving health is significant. According to the International Monetary Fund, the US economy accounts for something like 20 per cent of global GDP, still well ahead of second-placed China at 14 per cent. Incidentally, the UK accounts for around 3 per cent.
An improving US economic outlook has already caught the attention of investors and over the last 12 months US equity markets have out-performed most other equity markets. There is a good chance that this trend will continue for the foreseeable future. I should of course remind you that investments have a habit of falling as well as rising in value and investors should seek professional guidance to ensure that they maintain a diversified strategy that reflects the level of risk they can both afford and tolerate.