The U.S. economy has had trouble rising above a 3% growth rate since the financial crisis, a line in the sand often cited as the threshold for achieving “escape velocity” of sustainable expansion.
BofA Merrill Lynch chief investment strategist Michael Hartnett asserts that the underlying conditions needed for such a state are “tantalizingly close” in his latest note, but says there are a few missing links.
“We believe the missing links for the economy to achieve ‘escape velocity’ are real estate, banks, and small businesses,” he writes. “Until a virtuous cycle emerges that starts with stronger housing and flows to stronger bank lending and stronger small business hiring, we believe growth in the U.S., Japan, and Europe will struggle to expand at a pace that does not require central bank liquidity injections and zero interest rates.”
Bank of America is one of the largest commercial lenders in the United States, so Hartnett is able to cite some interesting internal data to gauge the state of lending growth in the American economy.
“The good news is that BofAML data appear to confirm that escape velocity for the U.S. is tantalizingly close, although it appears as if the U.S. economy may require a final push to achieve above trend growth,” says Hartnett. “Lending growth data, probably the most critical piece of the growth puzzle, suggest that the credit crunch is coming to an end.”
Hartnett also highlights mortgage applications, which have been trending lower on a weekly basis.
“Even though mortgage applications have yet to recover from the summer mortgage rate shock, we believe they have begun to stabilise,” he says. “We would have more confidence in a U.S.-led recovery when strong housing activity coincides with a normalization in interest rates.”