Is the US heading for a slump?

The US should be on the brink of a new recession if history is any guide. But we shouldn't be too quick jump to conclusions.

808-Derek-1200

Expect the US to keep pumping out growth for a while yet

The US should be on the brink of a new recession if history is any guide. The country's economy is now in its 87th month of continual expansion, since July 2009, which is significantly longer than the average post-war expansion period of just 58 months. But we shouldn't jump to conclusions, says George Magnus in The Times. That figure "masks two distinct periods".

In the first, prior to the 1980s, expansions had a short lifespan, lasting less than 45 months on average. But since 1990, the average of three expansions has been 95 months. In this new climate, the current phase "could certainly run on into next year or 2018", so long as there's no global shock or a political error by the new president and Congress.

Indeed, a pick-up in growth is more likely than a recession this year, says Capital Economics: GDP should increase by 2.2% in 2017, compared with 1.5% this year. Business investment growth should rebound from 0.7% to 2.8% in 2017, and exports tick up to 1.7%.

So it's no wonder that investors expect corporate earnings to bounce back. Earnings have declined for five consecutive quarters, but may have reached an inflection point. Notably, once you exclude energy companies, both sales and earnings figures for the S&P were actually positive during the second quarter of the year.

Against this backdrop, markets are "extravagantly confident", says John Authers in the Financial Times. The S&P 500 is currently trading at 18 times next year's projected earnings its highest level since 2002. This hasn't stopped investors piling into riskier and more cyclically geared sectors of the economy. Technology stocks have rallied strongly over the past month. Both Apple and Alphabet have gained some 10%.

Yet the reality is that "earnings results have set a somewhat lacklustre tone for the remainder of the year", says Eric Platt in the Financial Times. Estimates for the current third quarter are still falling. And uncertainty about the effect of US electoral uncertainty on consumers, and the fallout from Brexit, continue. Moreover, earnings declines this protracted have historically always been accompanied by equity bear markets, which have yet to be seen in the US.

It's also worth bearing in mind that US retail sales data is relatively sluggish. Real personal income growth has slowed significantly. The pace of employment growth has dropped. And there's a risk that the Fed will raise interest rates faster than markets expect. "Put all these together, and the highest prospective earnings multiples since the dotcom boom look like irrational exuberance," says Authers.

Recommended

Green finance is set to be the most powerful financial repression tool yet
Bonds

Green finance is set to be the most powerful financial repression tool yet

The government has launched its “green savings bond” that offers investors just 0.65%. But that pitiful return is in many ways the point of “green” fi…
22 Oct 2021
Equities are not a good inflation hedge
Economy

Equities are not a good inflation hedge

Institutional investors are definitely now worried about inflation. But they're not yet worried enough to flee to cash, says John Stepek
22 Oct 2021
Why fed-up workers are quitting their jobs
Economy

Why fed-up workers are quitting their jobs

Workers are leaving their jobs at an astonishing rate, especially in the US, leading to a shortage of workers. What will that mean for our economies? …
22 Oct 2021
Coal makes a comeback
Coal

Coal makes a comeback

The environmental case against coal may be clear, but that hasn't stopped the price rising more than fourfold in the last year.
22 Oct 2021

Most Popular

Properties for sale for around £1m
Houses for sale

Properties for sale for around £1m

From a stone-built farmhouse in the Snowdonia National Park, to a Victorian terraced house close to London’s Regent’s Canal, eight of the best propert…
15 Oct 2021
How to invest as we move to a hydrogen economy
Energy

How to invest as we move to a hydrogen economy

The government has started to roll out its plans for switching us over from fossil fuels to hydrogen and renewable energy. Should investors buy in? St…
8 Oct 2021
How to invest in SMRs – the future of green energy
Energy

How to invest in SMRs – the future of green energy

The UK’s electricity supply needs to be more robust for days when the wind doesn’t blow. We need nuclear power, says Dominic Frisby. And the future of…
6 Oct 2021