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M&G's Leaviss and Riddell put US under the microscope
M&G bond vigilantes Jim Leaviss (pictured) and Mike Riddell put the US economy under the microscope ahead of next weeks election.
US unlikely to go over fiscal cliff
Many investors and businesses worldwide have become preoccupied by the looming US ‘fiscal cliff’ that could happen in January 2013.
This is when the Bush-era tax cuts are due to expire and automatic reductions to government spending, agreed as a condition to raising the nation’s debt ceiling last year, would take about $600 billion out of the US economy. This fiscal cliff can only be averted by legislation that passes both houses of Congress and is signed by the President.
Leaviss believes that the fiscal cliff will ultimately be avoided. This is because the US cannot afford to lose such a significant contribution to economic activity, thereby creating a fiscal drag estimated to be up to 4% of the country’s gross domestic product (GDP) in 2013.
Also, recent research by the International Monetary Fund shows that the impact of fiscal policies on economic growth (‘fiscal multiplier effect’) could be larger than expected, as much as 1.5 times. As a result, going off the fiscal cliff could mean that the US economic growth would take a hit of as much as 6% next year.
In Leaviss' view, the threat of a 1930s style depression should prompt US politicians to get their act together, as they have done many times before.
However, the US political climate remains polarised between the two parties, which has led to outright deadlock in policy making. The decision by rating agency S&P to strip the US of its AAA rating in 2011 was partly based on this political unwillingness to compromise and find consensus. Nothing has changed considerably on this front.
Housing market recovering strongly but unemployment still high
Despite the heated political climate, the US economy is recovering at a good pace. One of the leading indicators that Leaviss and Riddell examine closely is the US housing market.
Here, figures are currently on a positive trend, showing that house prices seem to have bottomed, with the stock of available new homes decreasing to four months of supply. In contrast to 2007-2008, when Jim and his team used the monthly supply data to predict a recession in the US, this time the indicator is showing that the housing market will probably rally hard.
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