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Has the U.S. Economy Entered a Recovery Phase?

The U.S. economy surprised some by registering a" better-than-others" manufacturing performance in September according to the JP Morgan global manufacturing purchasing managers’ index. The index reversed three months of consecutive contraction for the industry. Together with unrestrained monetary easing, many analysts are now arguing that the worst is over for the U.S. economy.

There is cause for optimism, this is true. However, there are also challenges for the U.S. economy both in the short- and medium-term.  First of all, let's begin with the good news about manufacturing. Is it actually that good? Yes, the performance was far better than the previous three months and certainly, compared to other developed countries, even China, the industry was successful.  But, it is important to note that the index is still below 50, which is the mark that distinguishes contraction from expansion. We must remember that doing less badly does not necessarily mean doing well.

Secondly, it is quite probable that the much-talked-about fiscal cliff will be averted by the U.S. Congress by the end of this year. If not resolved, it will certainly be postponed. Washington partisanhip is very good at buying time. Even though the drastic scenario will be avoided, the perception of the U.S. consumer, largely shaped by media, is negative.  The adverse impact of the fiscal cliff has been discussed in the media for some time.  The average consumer may not know the details that the total taxes will be raised by nearly US$550 billion in 2013, but he/she knows that there will be financial consequences of inaction. We don't believe the average spender knows that if fiscal cliff were to materialize, the government would reduce spending by about US$600 billion as of January, all in the name of fiscal tightening.  But, he/she still is aware that spending will be reduced. At a time when the economy is battling with recessionary pressures, diminishing consumer confidence in the recovery is one of the worst things to do. But, Washington will always be Washington. Fiscal cliff threat will not go away until after elections.

In this precarious environment, U.S. consumers do not have much of a choice. A considerable portion has lost access to credit.  Their homes are valued considerably less now than a decade ago, largely because of declining housing prices.  Credit card debt is outstanding and banks are not eager to lend.  Those consumers who have the means are spending less because they are either paying down debt or do not trust the economic outlook and therefore save more.  This combination is a clear sign that economic recovery will not come from the consumer side in the short-term.  Finally, recent good news about the housing market was encouraging for many in the market.  It is true that the mortgage rates have declined considerably, but the market is still suffering from a large supply of houses, which will keep the prices low for some time to come. The recovery will not emanate from a robust housing market, either.

In short, economic outlook is still weak for the U.S. Do not expect recovery in the short-term despite occassional encouraging data from certain sectors.  The Federal Reserve understands the paralyzing impact of Washington politics on the economy and its recent QE3 announcement was the right thing to do.  
BERI Report Card for the U.S in BRS 2012-II Publication (September-November 2012)


 Most Probable Political Scenario:  Legislative activity comes to a close as both Republicans and Democrats are in the election mode. Mitt Romney narrowS the gap, utilizing the weak economic performance, which is a grave concern for majority of the public. President Obama benefits from better economic data that come in the third quarter and boosts his popularity. He also manages to portray Mr. Romney as an elitist politician. Mr. Obama wins the reelection in a close race. His next four-year term begins with drafting of comprehensive reform measures. Healthy economic relations with Russia are challenged by President Putin’s policies. An armed escalation of the crisis in Syria takes place in late 2012. U.S. forces are not directly involved.