Slow growth for the US, not recession
Updated: 2008-02-05 07:09
By Ernest Chan(HK Edition)
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As expected, the US economy decelerated significantly in the last quarter from the second and third quarters of 2007 to just 0.6 percent growth, which is below the market expectation of 1.2 percent.
Over the course of last year, the gross domestic product (GDP) grew only 2.5 percent, slightly below 2006's 2.6 percent and the 10-year average of 2.9 percent.
A drop below 1 percent often means the growth in the coming two quarters will be negative. Although it may not always be the case, it has spooked the market enough to keep most indices below the 250-day moving average, which indicates that a bear market is in the offing on a technical basis.
The main reason for the decline in GDP growth was a huge drop in business inventories. This is within expectation as business confidence dropped significantly in 2007, from 53 to 39 (close to what was recorded in the 2000-01 recession ).
A considerable inventory decline is unlikely in upcoming quarters following the sharp decline last year. Hence it should minimize the severity of the decline in GDP in the first and second quarters this year and stabilize the market.
Moreover, the recently released US economic data is fairly positive which suggests that the US recession or slowdown could be short-lived.
Durable goods orders rose 5.2 percent month-on-month in December, smashing the market estimate of 1.6 percent. On a yearly basis, the orders grew 5 percent, compared to the 20-year average of 3.8 percent.
Furthermore, stronger-than-expected consumer confidence and upward revision on last month's data also suggests that the US consumption story is not dead yet.
Given the aggressive rate cuts by the Federal Reserve, the market should have rebounded stronger than it has with such strong fundamentals.
However, the subprime's ripple effect is still overshadowing the stock market as all the US bond insurers are now facing downgrades (from AAA to AA or worse) for lack of liquidity.
No bail-out plan is in sight. There has been a lack of interest in the Treasury-backed bailout plan of the structured investment vehicles (SIV). Hence the market is expecting another round of write-downs as the downgrade would trigger a sell-off of assets. As a result, the chance of a global market rebound remains fairly slim .
However, the sell-off in the US may be close to an end. The average nominal decline for the S&P 500 in the last 10 recessions was approximately 20 percent. The index has already declined to that margin since last October from 1,565 to 1,310. Furthermore, with such a "not-so-expensive" price to earnings ratio compared to 2000, it indicates the market is not overvalued, and the US stock market will probably have limited room to fall.
The author is a director of Convoy Asset Management Limited.
(HK Edition 02/05/2008 page3)