Consensus is that the US economy will achieve a soft landing despite July to September producing the...
Consensus is that the US economy will achieve a soft landing despite July to September producing the slowest quarter of growth in four years. In November the US Commerce Department cut its estimate of third-quarter growth from 2.7% to 2.4%.
According to Terry Ewing, head of US equities at Britannic Asset Management, the reduction in GDP growth in the third quarter was partly due to inventory de-stocking and the slower pace of government spending.
Grant Wilson, North America fund manager at Martin Currie, says the key figure for the US economy is consumer expenditure which accounts for two-thirds of what happens to the US economy.
"We are still in the soft landing camp," he says. "Achieving a negative figure is hard unless consumers are spending in a really sluggish fashion."
He points out there are two main ways to negatively impact consumption. The government can use fiscal policy by raising taxes so that consumers would have to forego spending, or the second option is the application of a monetary shock, where interest rates would go up.
Wilson says: "Despite the fiasco of the election, we do know that both candidates ran on a platform of lower taxes. In addition the US has a fiscal surplus with the economy having grown for so long, so fiscal activity is unlikely to cause a reduction in consumption.
"In terms of a monetary shock, the chances are with the economy weakening, the monetary authorities are likely to reduce interest rates."
Ewing says that although the risks of a hard landing have increased over the past six weeks, the US is still heading for a soft landing. "There are some strains in the economy, especially in technology-land, with a question mark over the ability of companies with poor credit ratings to get financing," he says. "There has been a deterioration in credit quality in the banking sector and some people are suggesting we are heading for a credit crunch."
Ewing believes the risk of a credit crunch has grown over the past few months but is still not a certainty.
He says: "We would need more evidence of financial distress in the system than there currently is before we could say there will be a credit crunch. There are fears such a situation could cause investors to move to better credit rated companies and companies that have growth at a reasonable price, ones which have multiples of eight to 10 to 20 times earnings."
Ewing sees evidence of distress in the technology arena, especially in the business to consumer sub sector where many companies that floated on the stock market had questionable business models or have foundered through lack of cash flow.
"This has intensified over the last few months," he says. "The main sources of funding for these companies were venture capital groups and the debt markets.
The high-yield debt market is now unwilling to lend to companies with poor credit quality and the equity market has shut up shop.
Companies are no longer able to gain financing through issuing more shares. At the moment buyers are not interested, they want cash, bonds or blue chip investments."
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