Consumer confidence is falling in the US and exports have been suffering. But not all is doom a...
Consumer confidence is falling in the US and exports have been suffering. But not all is doom and gloom for the US economy.
Low interest rates will continue to lead consumers towards remortgaging and an increase in consumer spending. The decline in oil prices will lead to cheaper gas costs and Bush's tax package is likely to help improve corporate fortunes.
Andrew Milligan, head of global strategy at Standard Life, says before the war on Iraq started, oil prices had been rising at the same time as business and consumer confidence fell. Furthermore, inventories are unpromising, with a significant fall-back in the National Association of Purchasing Management survey.
Milligan thinks consumer confidence is back to September 2001 levels. However, he feels it is important to watch what people do, rather than say.
Retail sales have not shown a collapse and the housing market is still moving ahead. US consumers have also taken advantage of the low interest rates.
Crispin Cripwell, head of US equities at Insight Investment, says: 'Although consumer confidence has declined, there has been a recent surge in mortgage refinancing that may generate a bounce in consumer spending.'
According to Cripwell, the recent decline in crude oil prices following the start of the war is supportive of US consumers. They have been forced to pay $2 a gallon for gas for the past few months and with the extra money consumers may be willing to spend again.
The tax package Bush has put together is also set to improve the economy, says Milligan. Changes affect both income and corporate tax, which could have an impact on retail spending.
However, Cripwell thinks the impact of the tax package may have been overestimated. If it is assumed the proposals will generate 1% of GDP and this will be less significant than the injection experienced by mortgage refinancing.
Not all fund managers have the same view. For example, Mike Collins, head of asset allocation for Pictet Asset Management, says: 'Take refinancing out of the equation and the prospects for US consumer demand growth are not so great. The personal savings rate is low and household income growth is likely to fall if companies do embark on a further round of cost-cutting. Consumer confidence fell to a nine- year low in February, perhaps suggesting even weaker consumer spending growth in the months ahead.'
Cripwell warns the short-term impact of war may be lower consumer spending ' on the other hand, a successful resolution to the conflict in Iraq can only serve to bolster consumer confidence.
According to Milligan, the manufacturing industry has been suffering in the US following strong competition in Asia.
There is weakness in many sectors such as the electronic and the automobile industries. Cripwell sees the export industry being dominated by China.
GDP has been down for the US this year, but still forecasting trend rates and growth in the third and fourth quarter. Milligan feels a lot of people are bearish about the US economy without realising how well it has performed. He predicts 2.5% GDP growth, but the oil prices over the next three months will be the determining factor.
Cripwell expects real GDP forecast to be 2% against the 2.4% consensus owing primarily to excessive optimism on about manufacturing and earnings growth. He expects there to be weakness in manufacturing and disappointing earnings growth.
Collins says: 'US growth has stabilised at 2%-3% below potential, but at least it is positive for now. Probably the best scenario we can hope for is the US economy will continue to grow at a modest rate in the coming months. But palpable risks to this scenario remain.
'The Federal Reserve has done everything in its power to keep US growth going, but the legacy of its actions are structural imbalances that pose serious risks to future US and world growth.
'To sustain the recent upswing in profits, companies will need to cut labour and debt costs significantly. Such a prognosis would not concern us if interest rates were high and able to fall sharply as in 1981 and 1990, but this is clearly not the case today.'
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