Is the US economic recovery sustainable?

by Michael Collins, Investment Commentator at Fidelity - March 2012

The US jobs report for January and February are more proof the US economic recovery is strengthening, dispelling the notion of recent times that the world’s biggest economy could slip back into recession.

The country added 227,000 jobs in February after a 284,000 gain in January, to boost to 1.2 million the number of jobs created in the past six months, the strongest six-month spurt since 2006. That’s driven down the jobless rate to a three-year low of 8.3%, from a post-crisis peak of 10.1% in October 2009 and 9.1% in August last year. The employment gains were spread over an array of industries – a sign the recovery is broadly based – while other surveys show manufacturing and small businesses are keen to hire again.

The labour data is among a batch of statistics that shows the US economy is climbing out of its recessed state. The US economy grew at an annual pace of 3% in the three months ended December, the fastest since the second quarter of 2010. Consumer confidence has rebounded to where it was in early 2011 before the eurozone debt crisis deepened and the US lost its triple-A rating from S&P.

The deadweights of a broken housing market and over-indebted consumers are lightening. After five years of housing growth failing to match population (household) growth, pent-up demand for new homes is rising. Improving builder confidence and more housing starts signal that the sector is entering a virtuous cycle of building boosting employment, which bolsters the demand for housing and so on.

Since the housing bubble burst in 2007, consumers have reduced their debt levels and are closer to the point when they will borrow to consume again. Federal Reserve data shows the financial-obligation ratio for households (debt payments to disposable income) has fallen from a peak of 17.55 in the third quarter of 2007 to 14.42 four years later, its lowest level since 1994.1 Other Fed data shows consumer credit grew at an annualised rate of 9.3% in December, its fastest pace in more than seven years.

Indices:

The All Ordinaries Index has moved up over the past week increasing 68 points (or +1.5%) since closing last Friday to 01:45 pm this Friday.

                                                                                                                                       

The rest of the world as measured by the MSCI index is up 23 points (or +1.8%) from closing last Friday to end of trade Thursday.