The ‘picture show version’ of what is going on in the US economy

At a presentation last week, Kevin Lings, Chief Economist at Stanlib ran his audience through a presentation he appropriately called ‘What Now?”

Lings kicked off by showing a cartoon showing an aeroplane reminiscent of the one that made a safe landing in the Hudson River, with the passengers on the wings of the aircraft saying 'Nice landing. How do ya reckon we'll go on take-off?' 

He said that the developed-world economies had indeed had a safer than expected landing after the bail outs and the excesses of the last decade, but now the challenge was going to be to find ways to help economies of the world take off again.

At 0.25%, US interest rates are at decade-low levels. In December 2009, the Federal Reserve decided to keep US interest rates on hold, despite continuing signs that the US economy is recovering. With inflation continuing to be low, the Fed is not under pressure to increase interest rates as a means to tackle any inflationary pressure. Instead, it can keep the cost of borrowing low to help the US economy continue to rebound.

Interest rates are usually good leading indicators, because when they decline, money becomes more available, and the economy improves.

Lings then showed a series of slides which show that the US economy is making tentative signs of recovery. These slides, pictured below, show the improvement of inventories, exports, home sales, commodity prices and the tentative recovery of the S&P index on the stock exchange.

‘There are clear signs of stability in global ‘financial markets, while leading economic indicators have improved meaningfully,’ he said. ‘But, as can be seen in the following cartoon, economic stability has come at a significant cost. Budget deficits, bail outs, low interest rates and massive liquidity have all helped to prop up the economy.’

 But, he cautioned that US consumers, who contributed to 70% of the growth of the US economy were still embattled. Important leading indicators including levels of consumer debt, levels of consumer confidence, household debt as a percentage of disposable income, and personal income relative to unemployment statistics.

 He said that the South African economy mirrored the US economy, with the same leading indicators (house price recovery, export growth, improved inventories) showing tentative signs of recovery, and South African consumers reeling under debt.

Lings said that the credit crisis had impacted developed countries significantly more that emerging markets and that emerging markets were well placed to outperform their developed country counterparts.

‘The South African economy has been cushioned by the infrastructural development ahead of the World Cup, and the reduction of interest rates will provide some support in 2010,’ he said.

‘Most analysts have revised up growth estimates for 2010, but the recovery into 2010 is likely to be muted given significant headwinds,’ said Lings.