Standard Life Investments

Published Article

US Economy - Growing conviction


Although the US economic recession is officially dated as having ended in June 2009, the period since has rarely felt like recovery. Indeed, the brief periods of stronger growth have generally owed a lot to government stimulus measures, rather than innate economic health. Specifically, the economy has so far failed to achieve the necessary ‘escape velocity’ to enable it to break out onto a more self-sustaining growth path. However, moving into 2012, there were at last more encouraging signs.

Improved Sentiment

As Federal Reserve Chairman Ben Bernanke repeatedly stresses, there can be no conviction about the recovery without much stronger job creation. A self-sustaining recovery requires payroll growth in excess of the growth rate in the labour force which, for the US, is generally taken to be around 250,000 a month. Job growth may not be quite there yet, but there have been encouraging developments. The pace of firing has continued to slow whilst small businesses, which account for around 60% of all job creation, are less hostile to stepping up recruitment. As for the employment components in the ISM surveys, these are at levels consistent with sound job growth. Admittedly, that could also have been said early last year, and we didn’t see a strong follow-through then!

From the individual’s perspective, though, the jobs market is looking singularly more promising than at any time since the recession. Overall consumer confidence is not significantly different from a year ago, but confidence about the job outlook is better. Those seeing jobs as ‘hard to get’ have fallen to the lowest level since November 2008, whilst there has been a steady pick up in those seeing jobs as ‘plentiful’. The Fed will be hoping that this shift in sentiment will match actual jobs growth. So far, only around a third of the jobs lost during the recession have been recovered.

With stronger jobs growth and household confidence, consumers are more prepared to spend and borrow, and lenders are more likely to consider loan applications favourably. According to the most recent Senior Loan Officers’ report, there has certainly been a marked pickup in both corporate and household loan demand. As yet, however, there hasn’t been the hoped-for lending response. Yes, credit growth has risen, but there has only been a modest easing in lending standards. Nevertheless, that is progress as the period of serial tightening seems to be over. This should pave the way for an eventual freer flow of credit, another key ingredient in support of a self sustained expansion.

Consumer spending recovers

Much has been made of the insubstantial growth in real wages which, it is argued, will likely act as a drag on consumer spending potential. This is a rather one-dimensional view of consumer finances. Households have been deleveraging, to the extent that the Fed estimates that their financial obligations were at a 28-year low at the end of 2011. Add to that buoyant mortgage refinancings, and the 30% fall in heating costs, due to slumping natural gas prices and the unseasonally warm winter, and the consumer’s finances don’t look quite as constrained. News of the consumer’s death has been greatly exaggerated.

Now, whilst consumer spending may represent around 70% of final GDP demand, that spending in turn is dominated by spending on autos and housing. Spending on the former was savagely curtailed by the recession and its aftermath. Lack of jobs, lack of confidence and an inability to get credit saw sales slump. During this time the average age of US autos mounted – as did the pent up demand. As the economy has thawed, so has auto demand. Indeed, auto sales accounted for around half of the initial 2.2% estimate for Q1 GDP growth. Industry experts feel confident that demand will remain firm, and have begun to reduce the level of incentives.

The housing market has been at the epi-centre of the economic woes since it peaked in 2006. However, more recently there have been some encouraging signs that the worst is over. In Q1 residential investment made its first positive contribution to GDP growth since the recession, and there should be more to come. Household formation is up by about one million more than a year ago, housing vacancies (both rental and ownership) are down, house prices are stable, or even rising (in 12 of the 20 cities in the Case-Shiller survey), whilst permits for housing starts are at their highest level since September 2008. There is still a flow of foreclosed properties onto the market, and getting a mortgage can still be a problem. Nevertheless, the market looks to have bottomed, and seems more likely to add to growth in the near future.

Despite this rather better outlook, there are stll many who are unconvinced that much has changed. They point to the exceptionally warm winter as being behind some of the more encouraging data. However, when it comes to assessing just how much of a distortion the weather was, it seems quite small – only adding around 0.2% to growth, and 120,000 to jobs, for example. As for the soft Q1 GDP numbers, part of the drag was due to the expiry of the 100% depreciation allowance that pulled some business investment into 2011.


Twelve months on, the US economy is on a much sounder footing. Crucially, the labour and credit markets are in better shape, and that has been a boost to the key auto and housing sectors. Investors should expect US GDP growth of around 2.75% this year, amongst the best of the major economies.

Douglas Roberts, Senior International Economist, Standard Life Investments

First published in Investment Adviser on 28th May 2012