America's engine is spluttering into life
The US economy is finally showing signs of strength and with the Federal Reserve committed to stimulus in the short to medium term, a rebound could be around the corner.
Could it be that four years of zero interest rates, trillions of dollars of quantitative easing, the debasement of the US dollar and a bit of fiscal stimulus is sparking a recovery in the US?
Here are some nice facts on the economy.
GDP in the US has risen by a total of 6.7 per cent in the last 3 years, which includes 12 straight quarters where GDP has grown. The recession ended quite a while ago.
Over that time, over 5 million private sector jobs have been created, while the unemployment rate has fallen by 2.2 percentage points to be at a 4 year low of 7.8 per cent.
The core inflation rate, which reached a low of 1.1 per cent in 2010, is now running at 1.7 per cent.
The US stock market has risen almost 120 per cent from the low point reached in 2009 and now is about 10 per cent from reaching a record high.
House prices have risen 7 per cent since early 2012 which is helping to build confidence for home owners and the banks whose exposure to the housing market is still huge.
All up, it must be agreed, this is not a bad run of news.
Of course the context of this superficially good news was the economic and banking crisis which saw around 8 million jobs lost, the unemployment rate rise by almost 6 percentage points, house prices fall 35 per cent and the stock market plummet by close to 60 per cent.
Context is everything.
Even with the background of the economic and banking crisis, the scenario where the US economy recovers at a solid pace is gaining credence.
A housing upswing was always going the be the bedrock of any sustained pick up. Since the middle of 2011, the number of housing starts has risen by around 50 per cent, turnover of established housing has risen strongly, house prices are moving higher and the homebuilders confidence survey is materially strongly.
There seems little doubt that the US housing cycle has passed the bottom and is now on a trajectory of growth.
News that the unemployment rate fell to 7.8 per cent in September, the first sub-8 per cent reading in almost 4 years, is good news albeit clouded a little by the fact that the average work week, the participation rate and wages are weak. Job creation remains reasonable without being spectacular, with around 150,000 new jobs being created each month on average over the past year.
The recent economic news has not, however, been sufficient to see an end to the policy easing cycle from the Federal Reserve. Indeed, it was only last month that the Fed announced the most recent bout of quantitative easing (QE). The Fed remains to be convinced that the recovery is sufficiently robust to see the unemployment rate fall towards 6 per cent, hence its open ended QE. Fed Chairman Ben Bernanke has also indicated that "exceptional low interest rates”, that is the Fed Funds rate near zero, could continue until 2015 or at least until the labour market improves "in a context of price stability”.
It is easy to project a scenario where, with monetary policy stimulus still in full flow, the run of positive news rolls on and builds upon the base of a clear improvement in economic conditions. Think about it – the Fed will do whatever it takes to drive an economic pick-up. Its actions over the past few years are a clear demonstration of that determination to see economic growth and jobs pick-up. It is slowly but surely working and there is more to come.
The Fed has told the market and anyone who cares to listen that it is doing the same right now. Given the zero interest rate setting together with the open ended bond buying program, the US economy could well be in a full recovery in the not too distant future.
Some forward thinkers will no doubt start to turn their minds to the Fed’s exit strategy from a bloated balance sheet and what could be 7 or 8 years of zero interest rates. Some are already talking of upside inflation risks. That will obviously be a challenge for it and the economy to deal with but it is a story for another day.
In the mean time, the Presidential election is just 4 weeks away. From the perspective of the economy, it will be a good one to win because over the next four years, the US recovery is likely to deliver around 8 million new jobs, an unemployment rate near 6 per cent and a rebound in wealth and income to Americans.
Well done Ben Bernanke.