A Winter Warning

The holiday season is over, and as at the start of every year our thoughts turn to spring, anticipating the buds appearing on the branches of the trees, and the first small blades of green peeking through the soil that tell us that the crocuses or daffodils that we planted last year are pushing skyward and heralding the onset of a new season. 

Yes, we have much the same thoughts every year, and then the January snow, frost or cruel wind bites us, and we suddenly remember that we have months rather than days to wait until the time comes when we feel safe in discarding our scarf and gloves.  It is an abrupt reminder that winter is still firmly in place.  So maybe it’s best to keep the snow shovel handy and check that the heating insurance has been renewed, because we may have to be patient in watching out for those longed for green shoots.  We should perhaps adopt the same approach to the US economy, because although there are some signs of recovery visible, there is still the possibility of winter returning with a vengeance.

Signs of Spring

The Labor department’s monthly survey showed that 212,000 extra jobs were created in the private sector in December 2011, the fifteenth month consecutive month in which the economy has added jobs, and the sixth in a row that the number has exceeded 100,000.  There will of course have been a seasonal influence on the figures, with some of those jobs perhaps lasting only just as long as the holiday and sales seasons, but we it would be churlish not to view it as being anything other than good news.   So, why the caution you may ask?  Well, there are several reasons.

A Chill Wind

Firstly, unemployment still stands at 8.5% of the workforce.  That’s over thirteen million Americans without a job, and it means that whichever way you look at things, it will inevitably be a long haul back to anything that remotely resembles full employment.

Secondly, the National Debt has grown to in excess of fifteen trillion dollars, and now equals the size of the US economy.  That means that it’s on a par with the value of all the goods and services that America produces in one year, and it’s continuing to grow.  Such a debt can only be supported because of the low interest rates the Federal Government continues to enjoy.  One large jolt could undermine market confidence in America’s ability to pay her way, and even small rises in the cost of government borrowing would have a big impact.

Thirdly, there is the question of consumer debt, which although it has fallen over the past three years, is still more than eleven trillion dollars.  The effects of unemployment, the estimated seven billion that was wiped off home equity, and the ongoing problem of more than twelve million mortgages that are ‘underwater’ (in negative equity), will all impact on people’s ability to pay down their personal debts to  more sustainable levels, and will have an ongoing toll on consumer confidence.

Finally, it’s other people.  The US does not exist in economic isolation.  The growth rates of the developing economies still look impressive to us, but in reality they are falling, and that could make it more difficult for America to build on its exports to those countries.  More immediate is the problem of Europe.  It is not only Greece and Italy who are experiencing enormous financial difficulties, as many other counties in the European Union are also on or near the edge.  Ireland has recently imposed a fifth austerity budget, and yet the Irish Government’s spending deficit continues to grow, and even France has recently had its ‘AAA’ rating for government borrowing called into question.  At the moment the European economy is akin to a house of cards, and the governments there seem in no great hurry to fix it.  One more gust of wind and it could all come crashing down, and so interlinked are the European economies with American business and finance, that the impact on the US economy would be immense.

A Warm breeze

With all that said, America is not a naturally pessimistic nation, and the outlook for the future is not necessarily a gloomy one.  Jobs are being created, and inflation has been largely kept under control.  The fall in house prices means that they are more in line with incomes than they had become during the bubble, and combined with low interest rates homes are now much more affordable.  The US remains one of the three largest exporters in the world, and exports have grown considerably over 2011.  The decline in growth rates in developing countries is at least due partly to increased labor costs, and with more money in ordinary workers pockets it may in the medium term actually lead to an increase in demand for American goods amongst their populations.  As regards Europe, the situation is understandably worrying, but they have so far managed to keep the show on the road, and it is in their own self interest to ultimately resolve the situation.

So, like the eternal optimists that we all are, let’s keep looking forward to the warmth of spring, but let’s also remember that winter hasn’t yet gone away and it could still have a surprise or two left for us before it’s over.

Sources:

Federal Reserve White paper January 4^th 2012: The U.S. Housing Market: Current Conditions and Policy Considerations

Bureau of Labor Statistics January 6^th 2012: CP Survey (December 2011)

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• Investopedia: An Economic Outlook For 2012 (wire.kapitall.com)