The US Comeback Is Gathering Steam

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Capital Economics argues that the US recovery is not only happening, but also gaining momentum.

The firm now expects US GDP growth to rebound at a 4% annualized pace in early 2010, though they still forecast this to slow into 2011. 

The firm also warns that deflation remains a possibility, more so than inflation.

What’s causing their overall optimism?

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Manufacturing and leading indicators pointing up

US leading indicators continue to point upward while manufacturing output has rebounded sharply. The ISM Manufacfuring Production index has hit a three-year high.

The current account deficit coming in

The US current account deficit is now half its 2005 peak. July real exports grew for the third month in a row and are expected to continue doing so.

Home sales are coming back

Helped by a tax credit for first-time home buyers, home sales have picked up. This has helped reduce the supply of existing homes on the market.

No signs of inflation

Inflation isn't yet a threat, in fact deflation is the more likely risk. Still, negative headline inflation can be mostly explained by the fall in energy prices year over year. Core inflation will be watched closely, it was only 1.4% in August and could fall further.

And even in the future, inflation looks unlikely

As a further sign that inflation remains unlikely in the near-term, capacity utilization remains very low and unit labour costs have fallen.

Consumers are starting to come back

While future consumption could be weak due to high levels of household debt, there has at least been some improvement on this front.

Financial markets are much healthier

Financial markets continue to improve post-Lehman. Debt and equity issuance has rebounded. Corporate bond yields have come down from crisis levels.

Unemployment remains a weak spot

Unemployment remains a soft spot, despite the fact that job losses have appeared to slow. While employment gains tend to lag recoveries, Capital Economics admits that the lag could be disturbingly long.

Retail sales show signs of life

Retail sales and consumer confidence have improved. Household net worth has stopped declining, and started to grow.

Companies starting to ramp up CAPEX plans

Companies' capex intentions are rising, and credit market yields have fallen to facilitate this. The decline in residential construction spending has slowed and is improving.

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