The US economy is unlikely to grow fast enough to satisfy the market's expectations for rising profi...
The US economy is unlikely to grow fast enough to satisfy the market's expectations for rising profits and an end to deflation, according to Andrew Smithers, analyst at Smithers & Co.
Smithers bases this on an expectation that fiscal stimulus will be offset by rises in the external current account deficit and the household savings rate.
Added to this, he says, profit growth is likely to be weaker than normal in a recovery due to the fact 40% of profits now come from the financial sector.
To avoid corporate cashflow falling, Smithers says, the US budget deficit will need to increase by more than the rises in the current account deficit and household savings. While he believes corporate cashflow will rise in 2003, he feels this will probably reverse in 2004 and 2005.
Smithers notes: 'Our preliminary conclusions are that the official forecasts for the budget deficit are far too low to prevent a deteriorating cashflow in the corporate sector and the official forecasts understate the likely size of the budget deficit.'
In the shorter term, Smithers notes, the major risk is that the economy will not grow fast enough to prevent deflation from intensifying. He argues that with the current rate of inflation at anything between 1% and 2.5%, depending on how it is measured, a fall into deflation is quite likely.
However, Jonathan Asante, group economist at Framlington, believes there is no real risk of deflation damaging the US economy.
With production costs falling and imports becoming cheaper, consumers have more money to spend, which Asante feels is a positive that should remain a major driver of low inflation.
While Framlington is retaining its overweight position in the US, Asante says it does not believe there will be a strong recovery in demand.
'We are cautious on the prospects for third-quarter earnings numbers, despite the positive tone of company announcements in the second quarter,' he adds. 'Capital expenditure rose during the first quarter but we continue to believe growth in spending by companies will remain slow when compared to the standard of other recoveries.'
Consequently, he says, the group is looking to higher margin businesses rather than deep cyclicals, as they will benefit most from small rises in demand.
Chris Tracey, investment director at JP Morgan Fleming, is more bullish on current earnings numbers from US companies. He points to a good sales report for July from McDonald's and a Wal-Mart sales upgrade both lending support to the improving Dow Jones.
'Overall, US macro data confirmed the recovery still has plenty of momentum, with factory orders for July well ahead of expectations and the survey of service sector confidence hitting an all-time high,' he says.
Asante adds there is a chance US markets will outperform in the run-up to next year's presidential election. He says Framlington looked at 19 US elections in the past and in 14 cases, the S&P went up ahead of the election. However, he adds, there is a fair chance markets will fall the year after the election.
Recovery still has momentum.
Chance markets will outperform.
Imports becoming cheaper.
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