Will US resilience endure?
Of the developed economies, the USA did not fare too badly during 2011. The Wall Street 30 Index (Fig. 2.24(a)) started 2011 at around 11,600 and ended the year at just over 12,200. Although the S&P finished the year rather flat, the Dow Jones managed to pick up 4.7% during over the same period.
Consumer confidence has increased to its highest level since April 2011 and the four-week moving average of unemployment claims is at its lowest level in three and a half years. The
US consumer has started to spend again, albeit at a relatively low level and even the housing market has started to show signs up recovery.
The question remains, however, is this recovery sustainable, will the US economy keep on showing signs of resilience throughout the whole of 2012?
The answer to this question has many facets. The US still has a national debt level, both private and public, of about 3.5 times its GDP. While household debt only averaged 75% of disposable income during the 1970-2000 period, it currently still stands at 130%.
Unemployment also remains very high when compared to historical levels. In recent times wages have actually started to show negative growth in real terms.
As far as export markets are concerned, the picture does not look rosy either, more than half of S&P 500 companies make the bulk of their money from exports and as we know, economies in Europe and many other parts of the world are facing renewed fears of falling back into recession.
Another troubling situation for US exporters is the relative strength of the dollar or the relative weakness of the Euro, if you prefer it that way. A quick glance at Fig. 2.24(b) will clearly show what we are referring to.
This makes American products relatively expensive in Europe and elsewhere, undermining an export-led recovery in the USA. At the same time, a stronger dollar does, of course, make imports cheaper, which means US consumers might continue to favour cheap Chinese imports over more expensive local products.
Therefore, while profit forecasts for the new-year remain subdued, some of the biggest companies in America are sitting on large piles of cash. This could mean they will declare higher dividends during 2012, which will, in turn, put more money in consumers’ pockets and hence stimulate the economy.
What is not always clear from charts and statistics is the fact that the US has, to a large extent, not used the debt it incurred to finance productive investments. Instead, much of it went into financing consumer spending and non-productive government expenditure, such as warfare. This can, of course, not be sustained over the longer term.
The dilemma for the government is that it has insufficient funds to embark on the large-scale infrastructure development and maintenance projects that are urgently needed and that will create jobs and stimulate the economy.
While 2012 might well see a glimmer of light at the end of the tunnel for cash-strapped US consumers, there are structural problems in the economy that have to be addressed before a long-term recovery can take hold.
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