More analysts sanguine about US economy

More analysts sanguine about US economy


They cite strength of recent data, but others caution against reading too much into it


(WASHINGTON) A growing number of analysts are expressing confidence that the worst may be over for the US economy, even if it struggles for some time due to weak housing, tight credit and high energy costs.


The latest data suggests that the world’s biggest economy may have averted a calamitous downturn, and could even escape a recession, by the most common definition.


‘The US economy continues to labour under the adverse effects of three powerful shocks: the housing slump, the credit crunch, and the spike in energy prices,’ says Josh Feinman, chief economist of Deutsche Bank’s DB Advisors. ‘Remarkably, the economy has been able (barely) to keep its head above water despite all the negative shocks, a testament to its underlying resiliency, an aggressive policy response, and the relative strength of global growth.’


He predicts that the US economy, which saw sluggish growth at a 0.6 per cent pace in the past two quarters, will see a pickup to a one per cent pace in the second quarter and 2 per cent in the July-September quarter. He sees a softening to 1.5 per cent expansion in the fourth quarter and then a return to 2 per cent growth in the first quarter of 2009.


Some of the recent economic reports have defied forecasts of a sharp decline in US growth. Retail sales fell 0.2 per cent last month but, excluding vehicle sales, were up 0.5 per cent, suggesting resilience in consumer spending, the backbone of US economic activity.


‘We think the economy is beginning to recover after a sharp two-quarter slowdown,’ said Bear Stearns economist David Malpass. ‘We still don’t expect a recession. We think consumer resilience, as shown in April’s non-auto consumption and sales data, is likely, not the deeper slump assumed in recession forecasts.’


Spending should get a further lift as the government sends out tax rebates of about US$107 billion in the coming weeks as part of a US$168 billion economic stimulus package.


‘The impact of fiscal stimulus is probably the most important issue in the US economic outlook during the summer months,’ said Goldman Sachs economist Andrew Tilton. ‘A significant rebound in confidence and spending could fan hopes of a quicker recovery, while a failure of the economy to respond to the stimulus would be a significant disappointment to policymakers and the markets.’


New home construction starts rose 8.2 per cent last month to an annual rate of 1.032 million units. Even though the gains were in the multi-family segment and single-family homes slumped, analysts said that it was good news.


The labour market has also held up better than expected, and increased exports helped by a weak dollar have underpinned growth.


The broad US stock market has rebounded some 10 per cent since mid-March, when the Federal Reserve helped support a rescue of investment giant Bear Stearns, which was widely seen as a turning point for the credit crisis and market confidence.


Analysts credit the aggressive cuts in interest rates by the Fed along with efforts to boost liquidity to the troubled finance sector, as well as the government’s stimulus package.


Nigel Gault, economist at Global Insight, said that the US economy has shown resilience but that it ‘is still too early to turn our thoughts away from recession and towards recovery’ as the impacts of the financial turmoil on the economy will linger. Global Insight is predicting a contraction of 0.9 per cent in the second quarter. Largely due to the impact of tax rebates, it sees 2.3 per cent growth in the third quarter and overall yearly growth at a tepid 1.2 per cent.


Paul Kasriel, director of economic research at Northern Trust, cautions against reading too much into recent data. ‘Any blue skies you see are likely to be short-lived. The mortgage credit problems are not over. And credit problems in other sectors are just beginning as the housing recession spreads to the rest of the economy.’ – AFP


Source: Business Times

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