Although the US has been showing stuttering signs of recovery for some months, it is only recently t...
Although the US has been showing stuttering signs of recovery for some months, it is only recently that these have started to become clearer.
Indeed, up until now, geopolitical instability and lack of confidence in the corporate sector has shrouded the country's growth prospects, while the bear market has eaten away at share prices.
Undoubtedly, the swift end to the conflict in Iraq heralded a turning point in the economy's prospects. But the improving outlook for the country's corporations and the readiness of the Federal Reserve to help stimulate economic activity have also provided support. This is evidenced by the US stock markets' rapid ascent from its mid- March low.
While this brighter backdrop strongly suggests the economy is over the worst, the general consensus on the US's growth prospects, although positive, still tends to err on the side of caution. Is this modest lack of enthusiasm justified or is it simply a case of once bitten twice shy?
We do not believe it is, for the simple reason that the US is now definitely displaying signs of recovery. For example, business and consumer confidence has generally been increasing, with rising sentiment taking its lead from the end of the conflict in the Gulf.
Some positive signs have also started to emerge from the previously weak manufacturing sector, which in the words of the Fed, is in the throes of a nascent recovery. Indeed, August marked the sector's second month of expansion, following four straight months of contraction. Moreover, GDP growth for the second quarter has surprised on the upside, with July's figure of 2.4% overshadowed by its subsequent revision to 3.1%.
As mentioned previously, the willingness of the Fed to continue cutting short-term interest rates is also supportive.
In 2001, interest rates were cut to their lowest level in almost half a century. Since then, the Fed has continued with this unprecedented and aggressive phase of monetary easing, reducing interest rates on two further occasions, with the most recent cut taking place at the tail end of June this year.
Some may question what will happen once the interest rate reduction cycle comes to an end. But by then we believe the positive impact of these measures will have had adequate time to feed through to the broader economy, recreating the remarkable dynamism of the 1990's.
Finally, the relative success of the first and second quarter reporting season also inspires confidence. To date, more than 95% of firms in the S&P 500 have reported second-quarter results with profit, according to Thomson Financial, rising almost 10%.
This has encouraged many analysts to raise their expectations for the remainder of 2003.
Looking ahead, we believe the US will continue to show firmer signs of recovery. Business and consumer confidence has vastly improved, and manufacturing has now started to pick up, a trend that we are convinced it can build on. With earnings also surprising on the upside, we are confident that market sentiment will continue to firm.
Economy is showing some signs of recovery.
A more encouraging geopolitical backdrop.
Rates likely to remain at current low levels.
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