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US: have all of the risks really disappeared?

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Bruno Cavalier
Chief Economist at ODDO BHF

Last summer, the yield curve inverted, triggering panic about the outlook for the US economy. Having reverted to a normal position, the curve recently inverted once again… but optimism prevails. Why? First, because trade tensions have eased. Second, all the signs are there that the Fed is set to maintain an accommodative policy and may even loosen its policy if necessary (the latest reason is the uncertainty linked to the coronavirus epidemic). Third, the robust nature of household spending on consumer goods and real estate overshadows lacklustre business spending. 

The week's focus

In January 2020, almost all economic confidence indices rose or remained on an uptrend. Our aggregate index gained 1.1pt to 55.3, compared with a symbolic threshold of 50, and stands at its highest level since December 2018. Its level is associated with a GDP growth rate of around 2.5% per year (chart lhs). At first glance, this signals a slight acceleration. In detail, confidence is above its post-crisis average in the construction sector and among consumers. It is close to normal in services. It remains weak in industry but is tending to pick up (table rhs). When the mood is positive almost everywhere, which side should we choose? A number of risks warrant monitoring. 

  • Boeing - The halt to production of the 737 MAX could have a significant impact on the growth figure in Q1, via inventory effects. How long the shock will last and its repercussions on subcontractors are not known at this stage. However, the aerospace industry accounts for only a small share of economic activity (2.7% of industrial production).
  • Coronavirus – There is a good chance that the partial closure of the Chinese economy will reduce the demand addressed to US firms and possibly disrupt the production chain. Here again, exposure looks low: exports to China and imports of Chinese goods (excluding consumer goods) represent respectively 0.8% and 1.1% of GDP.
  • Politics – Recent developments (see p.2) favour Donald Trump, which is good and bad for the economy (good: pro-market tone, bad: erratic economic policy dictated by very short-term considerations). That said, the campaign is only just getting underway and the candidate finally nominated by the Democrats could well cause concern on the markets.
  • Fed – Based on its belief that the risk of overheating is low, the Fed plans to maintain extremely flexible monetary conditions. If there is a bias, it points towards an easing, not a tightening. But is this tenable if the economy starts to accelerate and might it not accentuate certain financial excesses?

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