Best not to jump to a US recession conclusion
It would be an overreaction to suggest the US is heading for a certain recession.
The US is facing a number of structural problems that are keeping a lid on economic growth. Business confidence is weak, which has translated into anaemic levels of hiring and capital spending.
The looming ‘fiscal cliff’ and the associated political dysfunction make it difficult to believe that the nation’s debt problems will be solved. The country is still in the middle of reducing its indebtedness, which is a long-term process.
However, it would be an overreaction to suggest that the US economy is also heading into a recession. There are a number of important sources of strength within the US – the strong financial health of the corporate sector, a healing banking system, historically low levels of credit card delinquencies and signs of increased discretionary spending by consumers.
Our view is that absent some sort of new catastrophic event, US growth should remain positive, if hardly stellar.
In the short term, stocks have managed to post gains in spite of a generally negative tone to the economic data. In some ways, the recent trend of relatively weak data has actually been beneficial for stocks in that
it has been boosting hopes for additional policy stimulus around the world.
In the week beginning June 16, the Dow Jones Industrial Average climbed 0.4 per cent, the S&P 500 index advanced 0.4 per cent and the Nasdaq Composite climbed 0.6 per cent.
Since the middle of the spring, the global economy has been faltering. Manufacturing levels around the world have been erratic, even in such emerging powerhouses as China and Brazil. Europe is already in recession, and growth in the US has certainly slowed from where it was late last year and early in 2012.
We are currently in the midst of second-quarter earnings reporting season and results have been at least decent, with forward guidance being fairly tepid. Over the past several years, US companies have been diligently cutting expenses, hoarding cash and deleveraging their balance sheets. Given the uncertain global economic environment, we expect most companies will remain conservatively positioned and will remain focused on retaining strong balance sheets. Companies are likely to continue returning cash to shareholders in the form of dividends, dividend increases and share buybacks, but below-trend levels of business reinvestment will likely provide a headwind for longer-term earnings growth. Looking ahead, given that we believe the economic recovery will be sustained, we would expect to see corporate earnings continue to grow, but the pace will be sluggish.