North America

United States: No recession but not much joy either

We are not in the camp that thinks the United States is headed towards recession but we wouldn't describe ourselves as particularly optimistic either. As discussed earlier, the biggest risk is that Europe drags the U.S. down through the banking system. Absent this, we expect a return to unspectacular 2-3% GDP growth through the first half of 2012.

The best description of the U.S. economic outlook is 'malaise'. The economy is stuck in a liquidity trap with the Fed funds rate at near 0%. Fiscal policy will only be a modest drag on growth next year and ongoing household deleveraging and the weak labour market will keep consumer spending subdued.

The text book answer would be a large fiscal stimulus (perhaps close to 10% of GDP) to kick-start the economy, revive confidence and reduce unemployment. The political impasse in Washington and high level of government debt rule this out, unfortunately. Monetary policy is effectively pushing on a string and the Fed has been reduced to policies like "operation twist" that will make only a marginal difference to long-term interest rates.

Russell Investments
EAA Investable Market Insights // November 2011 // Market Outlook

The market has been riding a wave of uncertainty that largely stems from not knowing how far Europe's debt crisis will spread, and reacting on a seemingly minute-by-minute basis to headlines from overseas. Battered by concerns that Europe's leaders would not get a handle on the euro area's troubles, Wall Street in recent weeks has largely bypassed U.S. economic reports, which mostly cast a better-than-expected light on the recovery, which continues to muddle along. (commented on 27 November 2011)

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