The American dream is back

Less than a week after the Bank of England's new deputy governor, Charles Bean, warned the global economic downturn could 'drag on', there was good news from the other side of the Atlantic

Fears over an American recession were partially thawed on Thursday August 28 when second-quarter growth figures were revised upwards thanks to consumer spending.

Did we ever doubt the Americans can consume, even when there’s a credit freeze on? Government figures show the US economy grew by an annualised rate of 3.3 percent in the three months to June thanks to local trade and increased net exports.

The revision contrasts with the deflated growth in the first quarter after a 0.2 percent reduction – the lowest rate since America’s last economic downturn in 2001 – when fears over anticipated redundancies spread.
This rise, which came after job losses failed to materialise, was much more than the 1.9 percent pace that was first reported, and the fastest rate for almost a year.

Analysts don’t agree over the long term prospects, although the news impressed Wall Street enough for the Dow Jones industrial average to gain 101 points, reaching 11604 in early trading.

Detractors were quick to point to the weakness of the dollar as the key factor stimulating growth. But hey, someone has to explore all the angles – even the cynics.

True enough, exports grew at a hefty 13.2 percent annual rate instead of the predicted 9.2 percent as foreign consumers showed they are as happy as the Americans to keep spending – as long as there is a bargain to be had. A good sign indeed.

Claims that a stronger dollar later this year will dent export demand and set the US economy on a final terminal downward spiral are about as insightful as a 1,000 word epilogue by John Rambo – the fictional marine immortalised by Sylvester Stallone.

The big worry remains the property slump, which continues to threaten economies on both sides of the Atlantic. But I’ve said it before, and I’ll say it again. The only factor threatening the real estate sector in the long term is jobs. While employers in key sectors retain good staffing levels, and as long as inflation can be pegged back, the future looks much brighter than most thought possible in late 2007.

The US labour market offers shareholders encouragement after jobless claims for state benefits fell last week to 425,000, the lowest reading for about a month. It was the third straight week that unemployment benefits fell as wage growth trails inflation.

Interest rates still show no signs of significant rises, eliminating the only other factor that could spark a major reduction in the value of bricks and mortar. The banks will not risk jeopardising the fragility of the market on the wider economy.

Addressing the annual conference of the world's top central bankers in Jackson Hole, Wyoming, Charles Bean said the financial climate appeared to be as bad as the 1970s although he claimed that there was light at the end of the tunnel if oil prices and credit markets could be stabilised. The former is an almost certainty (as demand will continue to wane), the latter is more of an issue, and is of course, the cause for property weakness. 

This week told us something we’ve probably known all along. The so-called ‘global recession’ is no more than a kick up the backside for those who made bad business decisions in one key sector: the loans market.
Beyond that, those who have grown in confidence over jobs look to have the confidence to spend more wisely in future.

The quicker the financial markets recognise that, the sooner global equities investors can bounce back from a nightmare year.