Seven Stories in Double - O Seven

Re-acceleration of the US economy

Many economists and US debt traders and foreign exchange traders are pessimistic about the outlook for the US economy. However, the equity market, the narrowness of credit spreads, like corporate bond yields over Treasuries or emerging market debt over Treasuries, would seem to agree with the Federal Reserve and other international officials that the US economy is most likely headed for a soft landing. The risk is that the US economy is not slowing down, it has slowed down. If the economy did not bottom in Q3, it may do so in the current quarter and that next year quarterly growth with average around 3.00%. The one “bet” that has proven wrong time and again is a bet against the US consumer. The doom-and-gloom camp argues that the slump in the housing market will drag down the over-extended consumer. While the economy was admittedly weaker than I thought in recent months, excluding construction and auto sectors and related industries, the rest of the economy appears to be doing well. The key to consumption is income and income measures continue to do well.

Trust but Verify

There is a battle going on between the Federal Reserve and the market. It is over the outlook for the economy and the appropriate monetary policy.

The Federal Reserve position is clear. As it expected, the economy has slowed. However, as Chairman Bernanke said recently: “Outside housing and motor vehicle sectors, economic activity has, on balance, been expanding at a solid pace.” The Fed suggests that weakness in housing and autos is likely to be self-correcting and in any event unlikely to spill-over and undermine the overall economy.