Since mid-November a nearly nonstop stream of good news from the US economy has led some observers to conclude that a sustainable recovery has finally taken hold. We are not among them.
Most recent leading and concurrent economic indicators suggest stronger-than-anticipated cyclical momentum in the US. We agree there has been real strength in the recent data, which has led WMR to revise our overall US growth forecast upwards for this year. But despite all the good news, we are still unconvinced about the sustainability of this “recovery.”
The struggling US labor market casts the biggest shadow on any celebration. December’s non-farm payroll report may have been the only major statistic below expectations, but we think it’s probably the most telling measure of the US economy’s prospects. The high unemployment rate hasn’t budged, and given the jobless recovery that followed 2001’s shallow recession, we don’t expect a significant improvement during 2011.
A second source of gloom comes from the US housing market. While we have seen some signs that the steep price correction—let’s speak plainly: the crash—has finally ended, recent data suggests the slide may be poised to resume. A new report from the Federal Reserve Bank of Dallas (*) paints a grim picture, offering the judgment that US house prices are still overvalued by almost 25%.
More darkness gathers from the savings behavior of US households. In the immediate aftermath of the financial crisis, the US saving rate rose but lately it has started to drop again. Let’s remember: the US private sector is still overly indebted. The inevitable deleveraging process it faces, with asphyxiating consequences on growth, is merely being delayed.
Last but not least, the most recent jolt of fiscal stimulus will at best have only a neutral effect on the economy. After all, it only supports the overly stretched public deficit for another year, and it does so through heavy use of the printing press to create fresh money. We still think the US government is just paving the way for new problems ahead. One obvious consequence would be high inflation but an even worse prospect would be a critical reassessment of US credit quality. Last week, both Moody’s and Standard & Poor’s warned that a triple-A rating for the US cannot be regarded as eternal.
The very mixed picture we have of the US economy has led us to increase our US growth outlook for 2011 but, indeed, to lower it for 2012. This sums up our skepticism about whether the current recovery has legs.
What should investors make out of this? We believe that more cheering cyclical surprises over the next couple of months should fuel the bullish sentiment on the US equity market. Given attractive valuations and the positive technical picture, we think enough factors are in place to recommend increasing exposure to US stocks. However, we would firmly mark a date in our calendars to reassess the situation six months from now.
(*) DiMartino Booth, Danielle and David Luttrell (2010): “The Fallacy of a Pain-Free Path to a Healthy Housing Market,” Federal Reserve Bank of Dallas Economic Letters, December 2010
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