Yet the early indications are that, with employment and consumer confidence surprisingly strong, steady expansion of around 2.5 per cent can be expected for the year.
It is worth bearing in mind, however, that the brighter prognosis for the economy in the short term may be flattered by variables. For example, the warmer-than-expected winter in the US appears to have delayed the expected spike in housing-related lay-offs. A deterioration has not necessarily been averted altogether, though: a colder snap later in the winter could still see the expected lay-offs come to pass. The 30 per cent slide in the price of crude oil since the summer has also been a fillip to the consumer, allowing what appears to have been a robust period of consumption over the Christmas season.
What is clearer, however, is that the housing slump is not leading to weakness elsewhere in the economy. Numerous jobs are currently being created in unrelated areas such as the government sector, healthcare and financial services as these sectors respond to heightened spending and the extended bull market in equities.
How long can this bull market continue? With earnings growth peaking, the continued upward trajectory in share prices will require multiple expansion this year. Therefore, equity market growth is predicated to a high degree on interest rates not rising further. While the recent data has certainly pushed back the first rate cut, it still seems possible that slightly lower rates can be expected for the end of the year, given the likelihood of inflation remaining under control.
The next three months will bring more clarity as to the true medium-term outlook for the US economy. The overall landscape encourages a more bullish view, but it will be important to remain focused on firms that have the potential to thrive whatever the trajectory of GDP.
Technology currently offers particularly attractive secular growth potential and, within this space, there are many opportunities to invest in companies offering high quality products in expanding markets. Conversely, the lower oil price means that energy stocks will suffer negative earnings momentum in 2007. The majors are also suffering from their inability to access reserves. The power in this regard lies increasingly with national oil companies in emerging markets, and it is likely that this will bring about a change in sector leadership in the coming years. A more cautious view on US large cap energy is warranted.
Cormac Weldon, head of US equities, Threadneedle Investments.
