27th January 2012
Bernanke says that low interest rates will remain in place until 2014 at least. His verdict was the investors should be prepared for another two to three years of sluggish growth, that unemployment would remain stubbornly high and the potential for contagion from Europe remained a real threat to financial market stability.
So far, so negative. But this Reuters blog reveals some of the numbers: "The Fed lowered by a notch its assessment for trend growth to the 2.3-2.6 percent range. Only seven months ago it had estimated healthy growth in the order of 2.5-2.8 percent. Maximum employment now is seen in the 5.2-6.0 percent range in the longer run. In the boom years, full employment was under 5 percent." The author's conclusion is that it is ‘no wonder people are buying gold', but given the situation in the Eurozone, it is worth considering whether these numbers actually look so bad.
Even Bernanke had some under-reported positive comment on the US economy: "Looking further ahead, economic activity is expected to accelerate gradually in conjunction with strengthening consumer and business confidence, improving financial conditions and the continuation of a highly accommodative stance for monetary policy."
In the meantime, industrial groups are reporting a strengthening of demand: "Caterpillar, the world's largest maker of earthmoving equipment, brushed off concerns about a possible slowdown in the global economy and said it expected real US construction spending to increase this year for the first time since 2004."
The article also quotes Sandy Cutler, chief executive of industrial equipment maker Eaton, saying that US markets were picking up: "Most people would say their view of the US economy is a little better than it was three months ago," he said. "Consumers are spending money, non-residential construction is starting to rise, the car market is picking up and exports and manufacturing capacity utilisation are up, creating demand for trucks and factory automation equipment."
Edward Yardeni, president and chief investment strategist at Yardeni Research, in the FT: "The US economy may be on the verge of a big comeback. It could experience an unusual second recovery over the next three years following the weak initial recovery of the previous three years." His argument is that US companies have supressed hiring for three years and this could rebound sharply if there is any uptick in confidence. With any increase in employment should come an increase in consumer confidence and activity. Equally, the housing market is recovering, albeit gradually.
Virginie Maisonneuve, head of global and international equities at Schroders urges investors not to neglect the US in her ‘top tips for 2012'. She says: "Make sure you own enough US stocks. The US is recovering slowly but is ahead of Europe." She believes that the US and emerging markets are likely to offer the most exciting economic growth this year.
Of course, there are many problems facing the US. It still has a debt problem – though the faster it grows, the quicker it will get rid of it. The election will undoubtedly be disruptive, but it may generate ideas for growth. There is a danger in forgetting that the US is still the most powerful economy in the world. If it sneezes the world catches a cold, but if it is feeling healthier, then the world may also be a little sprightlier.
One final question might be why central bankers appear to be natural pessimists. Mervyn King has been talking down the UK economy for some time, now Bernanke also seems to have turned glum. Trichet at the ECB was similarly pessimistic about the threat of inflation, to his detriment. Do they know something we don't?
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