There are increasing signs of wear showing on U.S. economy says Andrew Pyle, vice president and Scotia Economics head of capital market research.
In presenting his North American market outlook, Pyle told delegates at the Investment Funds Institute of Canada’s annual conference today in Toronto that Canada’s economy is outperforming the U.S. The performance gap should last for another couple of quarters, Pyle says.
However, despite the impact of higher energy prices, the trade deficit, and little to no growth in wages, he says his outlook on the U.S. economy is a positive one. Overall he says the U.S. economy has the potential to show between 3% to 4% growth.
Interest rates remain attractive for homebuyers. Although Pyle says he’s not bullish on equities, does at some point expect to see better performance on equities relative to real estate.
“Over the next six to eight quarters growth will be below its full potential,” Pyle says. Since 2002 the decline in value of the U.S. dollar has been troubling, “because we didn’t see any export growth.” He says the chronic U.S. trade deficit caused by the drop in exports remains a key risk. Although the U.S. is running a surplus in services, this too is slowing down. “Given the weak currency, this was not anticipated,” he says. The account deficit needs to be stabilized and repaired. He says it is a risk people should consider.
Meanwhile, spending by U.S. consumers is starting to be a cause for concern, Pyle says. Savings rates have been at “basement levels”, while low interest rates have fueled explosive consumer spending.
In the last two months however he says there has been deterioration in credit growth. “Without income growth it’s hard to get additional lending.” He says cash derived from the mortgage-refinancing boom was used to fuel spending, but it appears that consumers have reached a threshold.
Mortgage refinancing in the United States has largely disappeared. “That stimulus is gone,” he says. The next thing to fuel growth will be jobs. “That’s always the case, but we haven’t had job growth to talk about.”
The employment outlook for fall is troublesome. The September and October job reports will likely be negative due to the fallout from hurricane season. But Pyle says that consumers only see that the job market remains discouraging, which affects consumer confidence to spend, and in turn hurt the pace of sales.
It’s important that wage growth increases, he says “but that doesn’t seem to be happening.” Corporate profits are rebounding steadily, but he says if we’re banking on the consumer to drive the economy, some of this needs to shift into wages.
U.S. economy showing signs of fatigue
Wage growth needed to fuel consumer spending
- By: Kate McCaffery
- September 30, 2004 September 30, 2004
- 16:10