America’s recovery gathers pace

US economic data has continued to improve. Payrolls grew by 203,000 in November and the unemployment rate declined to a five-year low of 7%.

The University of Michigan’s gauge of consumer sentiment climbed to a five-month high. An index tracking manufacturing activity is at a two-and-a-half-year high. Annualised GDP growth accelerated to 3.6% in the third quarter.

What the commentators said

“Never mind” government budget cuts and October’s shutdown, said’s Free Exchange blog. The economy is “plugging along at a surprisingly steady clip”. The housing recovery has lost a little momentum of late as mortgage rates have risen, while corporate America still seems to be “hunkering down and curbing capital spending”.

But the employment recovery and the decline in inflation, boosting real incomes, are underpinning household spending.

Meanwhile, the outlook is encouraging, according to Capital Economics. September and October saw a surge in building permits, suggesting that higher mortgage rates have simply dampened, rather than choked off, the housing rebound.

The fiscal drag from Washington is also set to ease over the next 12 months after this year’s cuts. That should outweigh any further increase in long-term interest rates.

That’s because the US Federal Reserve has made it clear that its benchmark interest rate is set to stay at near-zero for another two years, and liquidity-addicted markets have twigged that tapering quantitative easing – reducing the pace of money printing, as the Fed is likely to do soon – is not the same thing as tightening policy.

So another sharp jump in long-term interest rates, as occurred when markets confused tapering with tightening earlier this year, is unlikely. Consequently, 2014 “could be the year that the recovery finally shifts into top gear”, concluded Capital Economics.

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