Heather Connon: Election could save US from recession

Heather Connon: Election could save US from recession

Goldilocks is back. No, not a sequel to the fairy story, but the way that many pundits now view the US economy: like the bear's porridge, it is neither too hot nor too cold. Indeed, the conviction that the US will avoid recession and enjoy reasonable growth has helped spur the Dow Jones to a new all-time high and, while the more broadly based S&P 500 remains below its 2000 peak, it has risen 11 per cent in the past three months.

A cursory look at some of the key economic facts could make that a fairly heroic assumption. The housing market, having enjoyed a boom that puts even our recent run to shame, is cooling rapidly and there is now at least a decent chance it will turn into a fully fledged crash. Even a gradual cooling could be bad news for consumer spending, which has been fuelling US growth.

Then there is the giant trade deficit, which is nearing $800bn (£430bn), of which over a quarter is with China - the key supplier of most of America's consumer durables. And there is also the worry about the inverted yield curve, which means that government bonds not due to be paid for 20 years or more are more expensive than shorter-dated ones. This is usually taken as predicting a recession.

Craig Heron, manager of New Star's fund of funds range, agrees that an inverted yield curve has predicted seven of the past eight recessions - but it has happened 12 times, so there have been times when it has not been followed by recession. He believes.....continued below

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growth will undoubtedly slow - the third quarter of the year could, he believes, come in below 2 per cent, compared with more than 5 per cent in the first quarter - but that still means the economy will be growing.

And, so far, the signs are that the housing slowdown has not stopped US consumers from spending. Jeremy Tigue, manager of the Foreign & Colonial investment trust, says the decline in the oil price is also a positive. He expects the housing market to slow a little more than our own did last year.

'The surprise about the US economy is company profits,' he added. 'We are in the middle of the third-quarter reporting season and there has been a surprising lack of bad news, despite the oil price and housing problems. So far, it all looks pretty positive.'

That does not mean earnings can continue to grow at such spectacular rates as they have seen. Mike Lenhoff, equity strategist with Brewin Dolphin, thinks analysts' forecasts are still too high and 'they are now starting to revise their numbers. That does not mean there will be no earnings growth, but their numbers have been too ambitious.'

He warns that the market is susceptible to disappointment - if, for example, a number of companies warn that analysts' expectations are still way too high, the stock market will be vulnerable. But, he believes, the downside is limited by the fact that investors believe that, if the economy starts to look shaky the Federal Reserve will react by cutting interest rates. 'That is the rosy scenario - and investors have been right to believe that rosy scenario for the past three years. They will wait to be proved wrong,' says Lenhoff.