But, while there are reasons to be positive on US growth, there are still a good number of reasons to be cautious.
First, it is important to note that these are only the provisional figures. Second, the growth in Q3 came largely on the back of net exports, personal consumption and non-residential fixed investment and government spending. Given that growth is struggling in the rest of the world there is no guarantee that export growth will continue to come in strongly, nor is it certain that government spending will continue indefinitely.
Indeed, the question on many lips is just what will to US growth if regions like Europe head back into recession. And, these fears have seen a number of commentators push out their expectations of a rate rise in both the US and the UK.
Which brings us to the third reason for caution – the possibility of a policy mistake.
As Jacob de Tusch-lec, manager of the Artemis Global Income Fund pointed out recently, the world is currently at a point in the economic cycle where the potential for a policy mistake is a massive risk.
“If the US doesn’t start raising rates soon, they might let the inflation genie out of the bottle, despite there being no inflationary pressures right now; we might turn around in five years from now saying we should have raised rates sooner. But, if they do it too quickly, too early they might kill whatever recovery there is.”
"In some ways, it is a situation of damned if you do, damned if you don't," he added.
Nancy Curtin, Close Brothers CIO said the Q3 GDP numbers will both cheer and not cheer investors. Her view is that, while the Fed will be reassured by these figures, it is not yet enough to trigger a reassessment of the still benign monetary policy
Anna Stupnytska, global economist at Fidelity Worldwide Investment, however, believes the number is an encouraging data point, one that confirms “the solid state of the US economy, and possibly putting to rest the market’s fears about growth, which have contributed to volatility in recent weeks.”
But, she too does not expect a change to the current interest rate any time soon.
“Inflation remains low, partly driven by the decline in commodity prices, and this should particularly benefit consumers. At the same time, there are no signs of meaningful inflation or wage pressures on the horizon, which suggests that theUS Federal Reserve will be in no rush to tighten. Indeed, while QE has come to an end, financial conditions remain accommodative, which should support growth well into next year.”
Where to from here?
In a note out on Thursday Natixis made the point that OECD country central banks currently fall into one of two categories, the first are those being confronted by deflation or by the risk of deflation, like the ECB and the Bank of Japan, while the second are those like the Bank of England, and the Fed that are seeing a gradual recovery in domestic activity, with inflation not too far away from the official target.
And, while it points out that the recovery in the latter group differs markedly from previous cyclical recoveries, markets are still pricing in the beginning of a tightening phase next year. But, it said, the the type of tightening process the market is pricing in is going to be a very gradual one, that will be conducted “much more cautiously than in previous monetary tightening phases”.
While the first two reasons for caution are sufficient in and of themselves, it is the third that everyone is focused on. And, there is no way to know whether or not a mistake has been made until it happens, but as a result of that, every data point needs to be interrogated closely.
