Investment Week – US Article
27 August 2009
Following significant fiscal and monetary stimulus, optimism regarding a US economic recovery is building with the change in 3Q09 GDP expected to be a positive 2.2% following a 1.0% decline in 2Q09 and a worse 6.4% contraction in the March 2009 quarter. Many of the indicators of improvement are in the form of diminishing negatives rather than outright positives. The recent Fed loan office survey indicated that fewer banks are tightening lending standards and restricting credit but this does not mean that banks have started to increase credit availability on a widespread basis. The same survey indicates that loan demand is still contracting but, at less rapid pace. While bad loans held by the largest US banks rose over 20% sequentially in 2Q09, this represented a slowdown from the rapid pace of deterioration in the previous several quarters. Early indicators of credit quality turned positive in 2Q09 which, combined with recent capital raising activity, have boosted confidence in stability of the banking system.
Signs of life have emerged in the US housing market with existing home sales in July registering the largest monthly gain on record as homebuyers responded to improved house affordability. The widely watched S&P Case-Shiller 20 city house price index remains negative on a year over basis but the market has reacted to the index increasing from one month to the next in both May and June. Equally impressive is the breadth of improvement with 14 of the 20 housing markets up from April to May and 18 cities increasing from May to June.
The unemployment rate has dipped to 9.4% from recent highs and the number of new unemployment claims has improved form levels seen earlier in the year. The job market remains far from healthy as the average duration of unemployment is the longest since records began in 1948. Not surprising, consumer activity has been uneven with July retail sales coming in at a disappointing 0.1% despite the positive impact of the “cash for clunkers” program that provided government assistance to buy a new, more fuel efficient car.
Inflation remains in check with the core Consumer Price Index up only 0.1% in July. The case for dormant inflation is underscored by falling unit labour costs and capacity utilization measures that have only modestly ticked up from multi decade lows.
US equity markets have responded forcefully to indications that the economic tailspin that gained momentum in the fall of 2008 has been halted with the debate now centred on the robustness of economic recovery. The 50% rise in the S&P 500 off March 2009 lows has been lead by the financial sector which has more than doubled. This sector, which in many ways is a repository of risk in the US economy, embodied the mind shift of the market. Early in 2009 the focus was on capital adequacy and survival with subsequent rally being driven by the shift to estimating the size of profits in a normal economic climate. Another key positive for US equity markets is the degree at which corporations have been able to cushion the impact of the economic fall with cost cutting. From operating expense controls at railroads to more effective inventory management programs at large discount retailers, corporate America has not waited for economic improvement to take necessary actions to protect profitably. The US equity markets will adjust as investors take differing views on the level of the liquid but at least for now the glass is right side up.
Bull Points
- Significant fiscal and monetary stimulus
- Signs of improvement in US residential housing
Bear Points
- Job market remains in a difficult state
- Consumer debt level still burdensome, requiring less spending and more savings to repair the household balance sheet
Jeff Morris Senior Vice President (US), Standard Life Investments
This article was first published in Investment Week on 7th September 2009.
