Markets point to consumer-led surge

WITHOUT doubt, the mood has shifted towards recovery in the US economy in the months ahead.

Even the sickly eurozone is expected to grow, if only at a paltry 0.9%, its lowest level in three pathetic years for the region.

Recent figures show that the EU area was stagnant in the first two quarters of the year, with GDP of just 0.1% in each.

While the data was pretty grim, the hope is that the projected US recovery will pull the EU along with it, albeit at a much slower pace.

Optimistic forecasters suggest the US will hit 2.5% GDP this year, while the eurozone will do well to touch the 1% level.

It is reckoned that it will be 2005 before the EU makes any impact on its unemployment rate, while talk persists of a further cut of 0.5% in interest rates.

If that turns out to be correct then the economic state of the EU is far from certain as indeed is the state of the recovery in the US.

Market watchers heaved a huge sigh of relief on Thursday when the power outage was found to be due to demand and not another terrorist attack.

That mercy aside, there is much concern still that rising long-term rates in the US with 20-year bonds gone out to 5% could damage the re-mortgage market, which kept money in consumers' pockets during the bad times.

Accounting for 75% of US growth, consumers are a critical part of the jigsaw.

For the past 18 months, the Fed has pared interest rates to a minimum in order to keep the beleaguered consumer on board.

To a significant degree, that philosophy worked, and it would be a bit of a catastrophe at this stage if the perceived return to growth in the US was about to shove up the cost of borrowing, which in turn could cut the ground from beneath the fragile recovery which the markets suggest is underway.

While the Fed is at pains to stifle any suggestion of an immediate return to higher short-term rates, the markets have taken the view that recovery is underway, and the rise in the cost of 10-year money so important to consumers who re-mortgage their homes on the back of lower bond rates might hit consumers hard.

US consumers took a terrible battering during the stock market slump and have suffered from a severe loss of income ever since.

Even if the economy is back on the road to recovery, the mystery still remains as to how US consumers borrowed and mortgaged up to the hilt can continue to spend as they do.

The broad theory is that the average US citizen seems to live off debt, as indeed does the government, when the massive deficits are taken into account.

One commentator said recently that the problem is "there was no adult supervision since Bill Clinton hit the White House."

While Bill was chasing interns, the Republicans were trying to screw Bill and Wall Street, and consumers went on a massive spending spree. The rest is history.

Sceptics say it remains to be seen whether or not order has been restored, and are casting a cold eye on recent stock market gains.

In early trading yesterday the FTSE 100 rose to its best intraday level in a year, as what analysts describe as economically sensitive banks and telecom stocks rose sharply.

But talk of a swift global recovery is a bit of a contradiction, given that markets only stopped their three-year slide a few months back. But not even the sceptics can discount the 20% gain since March that for the most part has held.

The markets are usually a good barometer of what the US is about to get up to.

They buckled in 2000 in anticipation of the economic slump, and hopefully their resurgence now is a pointer to better things to come in the years ahead.