Just as the recent downturn in the US economy has proven to be relatively shallow, so the pick-up in...
Just as the recent downturn in the US economy has proven to be relatively shallow, so the pick-up in activity should also be pretty shallow. We think 3%-4% annualised growth in nominal GDP in next full year, following the recent slowdown, is a reasonable assumption. Historically, recessions in the past have been heralded by leaps of 10%-15% in GDP in the first part of an upswing.
Actually, this has been a very atypical downturn: auto sales never slowed nor did home sales, reflecting the resilience of the US consumer sector. In fact, the recent weakness in the US economy has been seen almost exclusively in the corporate sector, while consumer spending increased right through 2001.
While sustained strength in home and auto sales has been good news, dampening the severity of the most recent slowdown, this also means we can not count on the typical dramatic recovery in these areas to spur as potent a recovery as those we have seen in the past.
We might see a modest reversal of fortunes in the coming quarters, with US corporations starting to rebuild their depleted stocks. US companies have aggressively drawn down their inventories of unsold goods by severely slowing the pace at which they were manufacturing their products.
Therefore, once we see any recovery in end demand, this will stimulate a pick-up in manufacturing activity that should give the entire economy a boost. We are already seeing the first signs of an upturn in industrial production.
By contrast, the effects of continued near-term lay-offs and relatively high levels of household indebtedness could going forward potentially dampen somewhat the surprisingly strong consumer spending seen in recent quarters. Admittedly, this has certainly not been the case as of yet but, nonetheless, we believe it is prudent to take into account factors that could marginally dampen this robust consumer sentiment going forward.
While recent history has taught investors and economists alike that it is dangerous to underestimate the willingness of US consumers to consume, it is also important to recognise several powerful factors that provided temporary support to US consumer spending in recent times.
These included low energy prices, tax cuts, and a record-high wave of home mortgage refinancings. Each of these factors combined to put significantly more money into the pockets of US consumers. As the up-front stimulative benefits of these factors dissipate, one should take into account the potential for US household consumer behaviour to likewise soften at least marginally.
It will be important to watch GDP growth and inflation for the second quarter ' if inflation remains low, it will allow the Fed to keep short-term rates low, which will continue to help the economy recover at a healthy pace. And if history is any guide, as this recovery continues to unfold, corporate profit margins will indeed improve ' as they do with every economic recovery. While this most recent economic slowdown was marked by a very muted overall decline in GDP, corporate profits have fallen quite severely.
Consumer spending remains healthy.
Industrial production is improving.
Overall productivity continues to grow.
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till