View Count: 123 |  Publish Date: July 29, 2013
Is the US recovery for real?

Engine room: a Cabot Oil and Gas natural gas drill at a hydraulic fracturing site in Springville, Pennsylvania. The US is enjoying a revival in energy supplies because of this process. Photo: Getty Images
The Great Recession, the worst since the Great Depression, was a turning point for the US economy. After a decade of sending manufacturing jobs overseas and replacing them with growing household debt, the US headed into a debt crisis.
For a recovery to take place many, including the Federal Reserve, believed a reversal of these factors was necessary. The Fed pushed interest rates to zero, bailed out the banks and weakened the currency; the government launched stimulus and manufacturing recovery plans; and an unexpected and fortuitous gas boom added impetus to both.
Naysayers argued that these policies would lead to rampant inflation and a sovereign debt crisis. They may yet be proved right; but right now the evidence is mounting up on the side of the Fed. The US is enjoying a manufacturing renaissance.
With China stumbling and Europe unable to get up after a huge fall, investors hopes for the next few years rest on the US. But does the data suggest a sustainable recovery? Advertisement
The answer is a qualified yes. Take a look at Chart 1, showing US GDP broken into its component parts over the past two and half years of a halting recovery.
Notice two things. First, the government has been detracting from growth since the Great Recession. Although federal spending rose strongly in its wake, state and local spending has collapsed. As the economy slowly grows, these two elements are slowly reversing: local spending is bottoming out and federal spending is now falling. US politics being what it is, theres little chance of public investment contributing to growth in the medium or long term.
Second, see how exports and imports are largely cancelling each other out? Little growth is coming from this area of the economy. That leaves private investment and personal consumption as the two mainstays of the US recovery.
Private investment
Whats driving the bounce in US private investment? Until recently, it certainly wasnt dwelling construction, which so famously overshot during the subprime crisis and left the US building very few houses at all for four years.
Growth has come from real and productive enterprise, in manufacturing and the same extractive sectors that have delivered Australia its post-GFC good fortune. According to Federal Reserve statistics, whilst government employment has declined and other sectors (such as finance) havent yet recovered, theres been a huge boom in mining and energy employment.
This is the US gas revolution in action. Through the innovation of fracking, shale gas and oil have dramatically reduced the USs oil imports and forced natural gas prices down from a pre-recession peak of $15.00 per million british thermal units (mmbtu) to $3.50 per mmbtu today.
The International Energy Agency predicts that the US may become an oil exporter in the next decade. And, as any Australian LNG investor will know, US gas is now so abundant its in the process of being exported to North Asian markets where Australia has until now held sway.
More importantly, the cheap gas price has helped fire-up US manufacturing, driving a rebound in US employment.
Personal consumption
The benefits of the gas boom have also reached into personal consumption. The US is contributing to global efforts to reduce greenhouse gas emissions, largely through conversion to natural gas generation. This and private gas heating has significantly reduced US household energy bills, freeing up disposable income. Retail has also been a strong area of job growth as a result.
Low interest rates have also helped. Although US mortgages are mostly fixed over the life of the loan, benchmarked to the 30-year bond rate, lower interest rate periods enable home buyers.
Over the past two years in particular, stimulus from the Federal Reserve has succeeded in driving the 30-year bond rate down to record lows. Thats reduced borrowing costs for consumers, as you can see in Chart 2.
Stimulus has also revitalised the US housing market over the past year or more, with renewed price rises and a return to dwelling construction, as Chart 3 shows.
Can it continue?
The US recovery has passed through several phases already. It is now starting to resemble a more traditional recovery with housing and consumers taking the lead as the unemployment rate dips to 7.5 per cent.
GDP growth is likely to continue at current levels, but its unlikely to accelerate. The plain truth is that the US has managed to force this recovery by driving down interest rates and printing money to such an extreme extent that it a withdrawal of that stimulus is likely to damage the recovery.
Chart 2 shows how recent rumblings by the Federal Reserve that it will begin to taper its bond purchases has been enough to cause 30-year mortgage rates to jump, undoing the last two years of cuts, the equivalent of five Australian rate hikes in just two months.
This has already begun to slow the housing recovery, with refinancing collapsing and new mortgages also falling sharply. The Federal Reserve may proceed with its tapering, but it will need to tread very carefully.
This article contains general investment advice only (under AFSL 282288).
By David Llewellyn-Smith of Macro Business, in conjunction with Intelligent Investor Share Advisor. BusinessDay readers can enjoy a free trial offer to Intelligent Investor Share Advisor, including access to 19 current Buy recommendations. For more Intelligent Investor articles click here.

Time: 7:29  |  News Code: 320610  |  Site: brisbanetimes
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