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U.S. Economic and Market Outlook: Sunny With a Chance of Tornados

Ken Taubes
calender-icon Posted on June 01, 2012


Most recessions are functions of a normal business cycle; this recession was a financial crisis marked by defaults by individual, business, and even government borrowers. Still, the U.S. economy is growing. It may be slow growth, but it is enough growth for the unemployment rate to fall from 8.5% to nearly 8%, and likely to below 8% later this year.

The number of people working is rising, the average hourly workweek is rising and average hourly wages are rising. That all adds up to more paycheck dollars to spend. After five years of household austerity to bring the debt burden down, there is pent up demand. A self-reinforcing trend—a positive feedback loop—of rising consumer business confidence and of hiring and spending appears to have gained traction.

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We expect the U.S. economy to continue on a path of slow growth, gradually declining unemployment, and low inflation. Three years into the recovery, things are finally beginning to look more normal, although subdued, with the cyclical, interest-rate sensitive sectors beginning to perk up. Auto sales are growing, and even housing is starting to see the light of day.

Risks to the forecast include energy prices, the European sovereign debt/banking crisis, and the “fiscal cliff” of higher taxes and budget cuts unless Congress acts. While the most immediate impact of Greece’s default appears to have been weathered, the situation is far from settled and Greece’s departure from the euro zone is a distinct possibility. If a future shock leads to the failure of more major banks, the U.S. economy would certainly be affected.

Markets are offering attractive expected returns to those willing to take (appropriate) risk; safety is very expensive. Treasuries are again near record lows and well below current inflation. If a return that keeps up with inflation is required or desired, a safety-first approach is probably inappropriate. The appropriate policy, we believe, is: Proceed with Caution, but Proceed.

To read the entire article, click here http://us.pioneerinvestments.com/misc/pdfs/economy/perspectives_2012outlook_june12.pdf

 

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