(April 4, 2012) — Fiscal policy, the labor force, and energy are some of the major trends that will shape the US economy and financial markets, JP Morgan Asset Management’s Michael Hood asserts in a recent whitepaper.
According to the paper, the 2012 presidential election looms large as investors predict the outlook for the US market. However, the medium-term forces that will shape economic outcomes are likely unaffected by the result of this year’s vote. “Some of these factors will likely lean against growth and markets, while others may boost returns,” the paper — titled “Beyond 2012” — says, outlining the following five major forces influencing the US economy.
1) Fiscal policy: This factor will likely weigh against domestic corporate earnings growth in the medium term, the paper says. “If, in the short run, the economy faces the danger of excessive fiscal tightening, the risk of insufficient adjustment over the long term also hangs over the outlook.”
2) The labor force: With fewer workers entering the labor force and consequently slower growth, domestic corporate earnings growth in the medium-term will suffer.
Can technological change help offset slower labor force growth?
The answer: “A burst of technological change in the coming years could serve as an offset to the sluggish rate of labor force growth. Without such a development—never easy to forecast or even spot as it happens—the economy appears to face a lower speed limit on growth in the coming years than investors were accustomed to in the past.”
3) Energy: Rising natural gas and oil production may help growth, but the US will not be able to insulate itself from global gasoline price trends.
4) Manufacturing: While higher labor costs in China and lower non-labor costs in the US may boost domestic manufacturing, small-cap equities could benefit by pickup in local manufacturing.
5) Finance: Investors will continue to gain if they are willing to lock up money as new regulations imply a “liquidity discount”. Furthermore, the paper notes that while regulation aimed at greater disclosure and consumer protection may dampen returns generated by the financial sector, efforts to raise capitalization levels and restrict proprietary trading carry broader implications. “How different sorts of assets will be treated in risk-weighting calculation is still partly up in the air and will likely not be resolved until the end of this year.”
The paper asserts: “We see two kinds of risk on the fiscal policy front. Failure of the political system to make choices in the near term could lead to excessive tightening as early as 2013, severely damaging the expansion. At the same time, that same cruise-control approach might fall short of delivering the necessary amount of adjustment over the longer run, though the US seems unlikely to run into a financing wall anytime soon.”
According to JP Morgan, the US labor force will expand more slowly than was generally the case in the postwar era. “This drag on growth will encourage the Fed to maintain its exceptionally easy monetary policy,” the paper concludes.