M&G's Leaviss and Riddell put US under the microscope

In fact, US house prices rose about 5% between February and August this year, according to the Federal Housing Finance Agency.

On the other hand, the US unemployment rate is falling painfully slowly, dropping to 7.8% in September from 10% in October 2009 – the high reached since the start of the financial crisis.

While positive, this is still above the long-term average unemployment rate of 5-6%. In particular, the number of ‘underemployed’ workers, who have stopped looking for a job altogether or are forced to work part time for economic reasons, is considerable. Together, this group and the ‘officially’ unemployed make up about 15% of the labour force.

The good news is that unemployment is a lagging indicator and likely to improve once the housing market rebound translates into a broader recovery.

In addition, compared with the UK and Europe, the financial system in the US seems to be in better shape and banks have progressed further in terms of cutting debt and repairing their finances.

Meanwhile, US consumers may be nearing the end of their deleveraging process and, with house prices rising, their equity and, ultimately, creditworthiness will improve. Thanks to these developments, Jim believes that US banks could soon start lending again.

Even though the economic backdrop seems broadly upbeat, the Federal Reserve keeps reiterating that its monetary easing is unlikely to end before mid-2015, driven by the lack of progress made in the labour market.

In order to keep the economy on track to deliver more jobs, the Fed has maintained near-zero interest rates since late 2008. The bank also recently announced another round of quantitative easing (QE3), where it will purchase mortgage backed securities worth $40 billion per month.

The Fed focuses particularly on the monthly gains in payrolls, aiming to boost this number from the current 160,000 to a steady 200,000. Consequently, Leaviss thinks that the QE3 programme could continue for at least three quarters.

In his opinion opinion, of all the major central banks, the Fed has been the most successful in propping up the economy and he considers the Fed a good example of ‘central bank regime change’. Under this trend, central banks in the West have become more concerned about keeping the economy afloat and reducing unemployment than strict inflation targeting. This is one reason why Jim disagrees with the notion that inflation will remain below 2% over the next few years.