FOREX TRADING

The general consensus of economists is that the US will experience 2 to 2.5% growth in 2010 with equity market gains limited to single digits and the USD likely to post a modest recovery. Aggressive fiscal and monetary stimulus from the Fed and US government helped to stabilize the financial markets and end the US recession. The USD posted 2.2% growth in Q3. The rise in US Q3 growth reflects an increase in consumer spending sparked by government programs like the cash for clunkers and tax credit for first-time homebuyers. The rebound in US GDP was primarily fueled by government action. It is not clear that the recovery can be sustained when these government programs expire and the Fed begins to withdraw stimulus. There is a great deal of uncertainty about the outlook and sustainability of the recovery for GDP in 2010. In the past, deep recessions historically lead to strong recoveries. Financial crisis produce weak recoveries. Because the global recession was caused by a financial crisis the GDP recovery may be weak.

One of the major headwinds to US growth is the risk that the US unemployment rate will remain elevated throughout most of 2010. According to Blue Chip Economics 1.1mln jobs will be created in 2010. Because the population is growing at a rate of 2mln per year 1.3mln jobs are needed just to keep up with population growth. This means that the US unemployment rate may hover around 10% for most of 2010. According to Career Builder.com one-fifth of US employers plan to add full-time jobs in 2010, this is up 14% from last year, just 9% said they plan to cut headcount in 2010 and 61% plan no change in staffing. A number of economists suggest that the headline unemployment rate may actually continue to rise as the labor pool is shrinking and many unemployed who run out severance try to come back into the workforce. Continued high unemployment will limit consumer spending. There is doubt of whether the increase in consumer spending during Q3 will continue in 2010 as government support plans expire. The US savings rate has been rising as consumers try to reduce debt burdens and fear becoming unemployed. If consumers continue to increase saving it will add an additional headwind for the US recovery.

There are some reasons for optimism about the potential for a brisk recovery in early 2010.The manufacturing sector continues to show improvement. US industrial production has posted growth in three of the last four quarters. Greg Ip writes in this week’s Economist that there are number reasons for optimism about the US recovery in 2010. One is the fact that business inventories are deeply depressed. The restocking of inventories will boost factory production. Chicago PMI for December rose to its highest level since 2006. Another potential positive for the outlook for the US economy is the rebound in US housing market. The US housing market has improved and shows sign of stabilization. According to Ip the housing market will benefit because the inventory of new homes are at their lowest level in 17 years. The outlook for housing remains uncertain. A number of analysts suggest that the housing market remains weak and that the recovery was driven by foreclosures and short sales. The Fed announced plans to add additional support to government mortgage agencies (Fannie Mae, Ginnie Mae and Freddie Mac) and the tax credit for first time home buyers has been expanded to April 2010. This could keep the recovery in US housing market going during the first half of 2010. It is uncertain what happens to the housing market when the Fed stops buying mortgage-backed securities next year.

Another positive for the US economic outlook is that capital spending is expected to rise. Ip suggests that with capital spending at 40 year low there is nowhere to go but up. He also expects continued support for growth from the Obama administration’s 787bln stimulus plan. The remainder of the stimulus money is expected to be gradually dispersed in 2010.

Sustaining US recovery in 2010 will require an increase in private spending and income growth. According to Ip increased US savings rate and high unemployment will limit consumer spending. In addition, consumer debt burdens remain high and could become more costly as interest rates rise in 2010. Rising interest rates coupled with the withdrawal of fiscal and monetary stimulus will reduce GDP growth and increase the risk of a double dip recession in mid-2010. If recession returns midyear, unemployment would likely surge and we could see an increased risk of deflationary spiral in the US. Because interest rates are already at zero and the budget deficit is soaring there would be few policy options to respond to a double dip recession. Also there is significant opposition in the US to increase government spending because of the record US budget deficit. President Obama may not want to take the political risk that could emerge if the administration calls for a second stimulus plan to sustain the recovery. Some economist’s question how effective the stimulus plan has been and the cost of a new stimulus plan would likely be met with significant opposition from deficit hawks.

Additional risks for the sustainability of the US recovery in 2010 include continued low-level of lending by banks and the prospect for new financial regulation. Despite interest rates near zero and large government bailouts bank lending to businesses remains weak. Obama administration officials are encouraging banks to lend. Regulators are expected to raise capital requirement for banks and this may also hurt lending and slow the pace of the US recovery. The proposed new regulations on financial institutions seem to be at counter purposes to the administrations call for increased lending.

The final wild card in 2010 is the uncertain outlook for inflation. If the stimulus is not removed in a timely manner the combination of massive government spending and the huge increase of the Fed’s balance sheet could boost inflation as the economy gains momentum. The Fed currently does not see an immediate risk of inflation but expectations could change quickly in 2010 if the economy grows at a faster pace than most analysts expect. Look for a fairly brisk US economic growth in early 2010 and growth will likely weaken in the second half of the year. Calls for a new government spending to combat the risk of a double dip recession could spark renewed selling of the USD in the second half of 2010 as fiscal worries re-emerge. Happy New Year!

By Michael J. Malpede

Easy Forex

Michael J. Malpede is Chief Market Analyst with Easy-Forex® and has previously been featured on Bloomberg TV, Bloomberg radio, Reuters, MarketWatch, Wall Street Journal, Chicago Tribune, Chicago Sun Times, Toronto Star and Nikkei press. In analyzing the markets, he draws from 29 years of Foreign Exchange Research as a Foreign Exchange Analyst.

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