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Tom Becket's uninspiring US road trip
by Tom Becket on Apr 30, 2014 at 14:04
Contrary to the excitement and intrigue I was able to report following my trips to the US over the last few years, this time all I can say is that everything appears ‘dead calm’ across the Atlantic.
For those of us of a contrarian bias, opportunities are scarce – and it seems set to stay that way.
At the headline level, the US economy continues to grow at a moderate and steady pace, despite the weather distortions earlier this year.
So was the weather as bad as has been suggested? Going on the haunted looks of the residents of the East Coast and the winter-scarred roads then I would say yes. Companies surely have an excuse to release damaged results for Q1.
But will the dawn of spring herald a shift higher in the US economy, which is what the consensus expects?
Possibly, but any pent-up demand should be transitory, and my impression is the circa 3% growth expected for the full year is too high. From what I heard, US growth seems much more likely to be circa 2-2.5%. In reality, that level would be close to the US economy’s long-term potential growth rate.
The major reason for the continuation of lacklustre growth is that the channels of credit in the economy remain clogged. Banks are taking a more constructive view to loans, but credit creation remains uninspiring.
At the same time, the companies that are hoarding ever greater amounts of cash are still reticent to ramp-up investment in their operations and most debt raised in the credit markets is going towards refinancing and balance sheet strengthening, rather than investment.
There are examples of funding being secured for M&A and dividends, but it is not enough to get spirits surging. There will be another gentle improvement in US capital expenditure this year, but none of the macro, bond or equity investors I saw believe it will be Boomtown, USA.
There is also scant evidence of companies starting to boost employees’ salaries. Wage inflation remains subdued, outside certain specialist sectors such as construction. Some surveys hint at better paydays to come, but most evidence suggests that while there is considerable slack in the labour market, there is little hope of higher wages.
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