Sentiment on the U.S. economic outlook has gone from a flurry of uncertainty at the start of the year to renewed optimism. Admittedly, there are grounds for being bullish. Growth has held up despite tougher fiscal and tax policies; the housing market recovery has continued; and the Fed has stuck to its easy money policy. But let’s not get carried away! The latest numbers are no more encouraging than those available at the end of last year. In particular, decelerating productivity growth, with all that it implies in terms of profit, investment, and job trends in the next few quarters, may well drag the U.S. economy back down in the second half of the year. And with a policy mix that is less accommodative than before, the key ingredients for a genuine recovery are still nowhere to be seen. All this has conditioned our analysis on several points:
- We wonder whether a change in monetary policy is on the short-term agenda—and worry that the Fed may withdraw its support too soon.
- While we aren’t overly concerned about trends in the U.S. bond market and the euro’s exchange rate, we do suspect that the stock market will be more vulnerable to disappointing macroeconomic data.
- We have very little faith in the American economy’s chances of regaining its status as powerhouse of the global economy before the year is out.