Monday, December 20, 2010

.Three reasons the U.S. economy is ready to roll

The United States could finally find its economic footing in 2011, and surprise analysts with strong growth, independent investment firm BCA Research predicts.

Here are three key reasons why:

Consumer awakens
After the financial crisis brought the U.S. economy to its knees in 2008, consumers sent the country’s savings rate soaring, while subsequently slowing consumption. But the savings rate has since settled at 6%, and BCA says it now believes the time is right for the U.S. consumer to start spending again.

Spending growth, however, will have to come from income growth, says BCA. The investment firm predicts that a natural growth rate of real income could be around three to 3.5%.
If the current savings rate of 6% holds, BCA says consumers will have slashed more than US$2-trillion in debt in three years time. “All of this says that consumer deleveraging has passed its most chaotic and vicious phase and has entered a steady state, which will allow growth in consumer spending to resume,” BCA says in its report.

Businesses start spending

While businesses lost a big chunk of their capital base in 2008, the past two years have seen enhanced profits due to cost cutting and squeezing out productivity.
But BCA says that approach is no longer feasible, and capital spending will have to increase for companies to remain competitive.
“Our model projects a strong upturn in capital spending this year,” says BCA in its report. “This is not surprising, given the fat profit margins, improving economic outlook and extremely low borrowing costs.”

Exports continue to pick up

With a significantly weakened U.S. dollar, BCA points out that American manufacturers and exporters are working on a much cheaper cost base, which has led to somewhat of a revival. BCA says there is room for that revival to be even stronger, however.“Perhaps the dollar has cheapened enough to allow Americans to re-industrialize themselves and to reorient the economy away from excessive consumption toward producing goods and services for the rest of the world,” BCA says in its report.

Of course, there are a few caveats to keep in mind when it comes to U.S. growth, says the research firm.
For starters, housing remains weak, and might take years or even decades before it recovers to its old strength. Meanwhile, if job growth again disappoints in 2011, weak income growth and spending could halt economic growth.

But BCA remains optimistic.
“Despite all the potential risks and uncertainties, our baseline forecast is that U.S. private sector demand is more likely to strengthen than weaken next year, and that the public sector will add some fresh stimulus to the system, ensuring the recovery continues to gain traction,” says BCA

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