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S. Balakrishnan

The global economy itself is in far better shape compared to a year ago. Growth should accelerate with China and India leading the way.

ALMOST all the data point to a surging US economy. True, there are some brown spots — the fall in the latest ISM manufacturing index (still above the 50 level though, signifying a positive outlook), decline in durable goods orders and drop in consumer confidence.

But these were overwhelmed by the unexpected growth in jobs — the greatest area of concern — last month. Non-farm payroll increased 57,000. There was net job creation after a gap of several months. Earlier, GDP growth in the second quarter was revised to upwards of 3 per cent.

Clearly, the economy has far more oomph than originally thought by most analysts.

October is the earnings season. Corporate profits should come in at the high end of projections. The watchword in US business is "lean and mean". This is yielding results. Productivity has soared and, with it, profits, even after sharing some of the extra dough with employees. In fact, the share of owners in value addition is increasing more than that of labour. There is so much to go around that those lucky enough to hold their jobs are seeing their earnings swell. This, in turn, is keeping up consumer spending, which, as is well known, is as much as two-thirds of GDP. Even though the jobless rate is 6.1 per cent, the increasing incomes of 94 per cent of the work force in employment are obviously responsible for the strong upturn.

Spirits on Wall Street have not been better for a long time. The Dow Jones Industrial Average has topped 9,500 and the Nasdaq is close to 2,000. Of course, there is still some way to go, especially for the Nasdaq, before they come close to their all-time highs of 11,000+ and 4,000+. But the past months have seen a remarkable recovery from the depths of below 7,000 and around 1,200 for these indices. The global economy itself is in far better shape compared to a year ago. Growth should accelerate with China and India leading the way (despite the prospective strength of their currencies). Even Japan, at long last, is coming out of the woods. In the First World, the US is the obvious frontrunner. It would be no surprise if its growth touched the range of 5 per cent. The depreciation of the dollar will likely continue and provide additional stimulus to US exports. At the same time, given the pace of US recovery, and the burgeoning Asian economies, the impact of currency strength on Japan and Europe will not be significant and will be offset to a good deal by their relative weakness against non-dollar currencies.

What about inflation and interest rates? The best of inflation is probably behind us. Deflation is no longer the threat that it was some time back. Energy and commodity prices are on an upswing. Pricing power is slowly coming back to producers. With rising incomes, there will be less resistance to sticker prices and pressure for discounts. Corporate profits seem poised to soar on the back of productivity gains and, now, better price realisations. The foundation is firmly in place for buoyant stock markets.

Reviving economies and markets are not good news for bonds. The gap between long and medium rates on the one hand and short rates on the other will continue for a while. Central banks will keep short rates generally low, but bond yields will increase, given the credit demand in growing economies and the almost uniformly poor budgetary position of Governments.

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