Apologies in advance for sounding a tad gushing, but the evidence flowing out of the US in the last few days suggests that the US economy is very close to full recovery. The finance crisis of 2008 may be close to being banished to the history books. It may not sit well with you, and many commentators in the US might greet such a statement with incredulity, but let the facts speak for themselves.
First take banks and then move on to debt. Earnings at US banks during Q1 were $40.3 billion, and never before have US banks made so much money in a single quarter. The capital tier one capital ratio at banks – that is to say the ratio of a bank's core equity capital to its total risk-weighted assets – has now been 13.1 for the last 12 months. The Basel III accord requires a capital tier one ratio of 6 per cent. According to the OECD, the ratio of US household gross debt to US disposable gross income is now just 107.9, compared to 130.7 in 2007. In fact in the year 2000, the ratio was only 96.4. So US household debt to income is close to levels from 12 years ago.
As for US government debt, the US deficit this year is expected to be $642 billion, or so estimates the Congressional Budget Office. To put that in context, last year the deficit was $1.1 trillion. It will, in fact be the first time since 2008 that the US deficit is less than $1 trillion. And, by the way, not so long ago the Congressional Budget Office was projecting a deficit of almost $200 billion more than that. See: US debt is falling: does this prove austerity does not work?
US consumer Confidence, according to the Conference Board, recently hit a five year high. US house prices rose 7.2 per cent in the year to March, which was the largest annual rise since May 2006. See: US and UK house prices on the mend: one is better than the other
The Dow Jones hit a new all-time high two days ago (May 28), and the S&P 500 is hitting new highs so often it is becoming boring.
US unemployment fell to 7.5 per cent in April, which the lowest level since the US President was called Obama. Over the last seven months more than one million people have joined the US non-farm work-force, and Capital Economics predicts that May saw another big jump in employment.
The crisis of 2008 began in the USA, and there are good reasons to think it may be close to ending.
This begs the question: why? A number of factors were at work. The US did embrace creative destruction in some respects, and there is no doubt the US economy has an ability to reinvent itself that is truly impressive. But the US was also stimulating the economy with fiscal policy, while the UK and the rest of Europe hit the brakes with austerity. Shale gas helped too, maybe in fact it helped a rather a lot, and that actually the US recovery is evidence that in order to grow, the West needs cheap energy.
It is harder to say what effect QE has had. It may well have stopped the recession from turning into depression. It may also have driven up equity prices and stopped the rot in the housing market. This in turn may have lifted US consumer confidence, and enabled banks to make more money, while record low interest rates enabled households to pay off debts.
Looking forward, student loans may be the next crisis-in-waiting in the US. That and the growing level of income inequality is disturbing and may well have a negative economic impact.
© Investment & Business News 2013