Real GDP in the US grew by around 1% in the first half of the year, a rate just above stalling and one that contributes to worries about the state of the economy. Although we acknowledge the downside risks, we continue to believe that a US recession is not in the cards. One bright spot is that gross domestic income (GDI) in the US grew faster than GDP over the first six months of 2011.
GDI is an equally valid measure of the state of the overall economy, and this difference suggests the possibility that GDP data may yet be revised higher. In addition, if the US economy is about to fall into recession, we would likely be seeing weakness in unemployment claims, capital expenditures and corporate profits, none of which is occurring. As a result, we do not believe a recession will be forthcoming anytime soon.
In some ways, whether or not the economy does sink into recession is a technical point. If we do see a double-dip recession, any such contraction should be mild. If the economy avoids a recession, growth will still be weak. From an earnings perspective, any decline that comes about in earnings growth due to economic weakness should also be smaller than the average contraction that occurs during a typical recession. Looking ahead, our forecast is that earnings growth flattens out while GDP remains very low.
While expectations had been growing that the Federal Reserve would signal additional quantitative easing measures, those expectations faded somewhat by Friday when Fed Chairman Ben Bernanke delivered his highly anticipated speech at Jackson Hole.
At this point, we are not anticipating that additional easing measures (beyond keeping rates extremely low) will be forthcoming. There is some disagreement within the Fed over what should be done, the political environment surrounding Fed action has turned contentious and core inflation has moved up somewhat. As a result, we do not believe the Fed will be taking additional action unless renewed deflation risks emerge.