It appears the American economy is rebounding stronger than first expected. Reuter’s finds retail sales increasing by 1.1% in September, above expectations. This information came out in the same week that the stock market turned positive for the year (finally) despite a series of rough weeks responding to the uncertainty coming out of Europe. Combined with the continued increase in 10-year Treasuries from their lows of 1.9% in August to 2.2%, and you have the picture of an economy pushing forward and becoming more and more self-sustaining. As I mentioned before, the stronger increase in retail sales reflects two main theories of why American growth faltered during the summer. Oil has fallen substantially since March and has settled into the mid-80′s for about two months now. With lower prices for gas, this means American consumers can devote more of their income towards consumption (new cars, clothing, etc) as opposed to simply filling up the tank. The second reason is the restoration of healthy supply chains in the wake of Fukushima last spring. The auto industry suffered from a lack of component parts manufactured in Japan, which put a crimp on growth. With these restraints now coming, the auto industry will need to fill more orders and buff up dwindling inventories.
If you believe the most recent estimates by economists for the US economy, then the US is likely to grow at around 2.5% during the rest of the year. This is woefully short of the 4% all of us wanted to see earlier in the year, but 2.5% is a vast increase from 1% growth. Historically when the American economy grows at less than 2% there is much (~70% is you believe the Financial Times) greater chance than usual of a recession following in short order.
That growth is rebounding now doesn’t necessarily mean the US economy is out of the woods just yet. Consumer sentiment fell far below expectations in September hitting 57.5 as opposed to the expected 60.2. As a lagging indicator, I would not draw too much from this, but rather wait until we get the October data to make any lasting judgements of American consumer sentiment. More worryingly, the spred of French bonds over German bunds has widened to a euro-era record of 0.97%. Not to be a fearmonger, but a rising spred between French and German bonds is the worst thing that can happen in Europe. So far the European rescue squad has consisted of France and Germany as they rankle over which is the best method to approach the bailout process. With French banks already downgraded, rising French bond yields only discredit the Franco-German efforts to support the faltering euro. This is currently the greatest threat to American growth going in to 2012. The current G-20 summit gives President Obama along with other world leaders a good chance to urge European leaders to overcome differences based on principle and end the crisis before the contagion spreds beyond Europe.
We’ll have to follow the G-20 summit closely to see whether or not our leaders can finally find a solution to a crisis that should have been solved months ago.