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Leading indicator?

The United States’ stock markets are booming. In fact, the S&P 500, the Dow Jones Industrial Average and the Nasdaq are up 14 per cent to 15 per cent so far this year. If there was ever a bull market, this is it.

Stock market performance is considered as a leading indicator of macroeconomic performance, so what does this mean for the US economy?

Earlier this week, the Congressional Budget Office released a report which indicated that the US fiscal deficit was down 32 per cent in the first seven months of this fiscal year (the federal government’s fiscal year begins in October). The improved fiscal outturn was due primarily to higher revenues; expenditure was down by just 1.9 per cent.

The strong revenue growth was on account of the expiration of the two-year cut in payroll taxes, higher tax rates on high earners and higher wages and salaries (i.e. higher income tax revenue from higher levels of employment).

In April, the US unemployment rate fell to 7.5 per cent from 7.6 per cent a month earlier. Employment gains exceeded the expectations of most economists and revisions from previous months revealed that the economy has been adding jobs at a faster pace than previously thought.

In fact, the US has gained an average of 200,000 jobs a month in the past seven months. That is slightly below the number of jobs the American economy needs to create monthly in order to get the unemployment rate down to the familiar five per cent.

Other indicators have also been positive; housing is rebounding, corporate profits are soaring, consumer confidence is returning and a vibrant energy sector in taking hold. Technological advances, namely “fracking” have been instrumental in unlocking huge natural gas reserves. Some industry insiders are confident that the United States is now on its way to achieving energy independence. The resulting reduction in energy cost will be a boon for the economy.

Furthermore, in the first quarter of 2012, the US economy advanced by 2.5 per cent. Some analysts have noted that the pace of private sector growth was actually four per cent, suggesting that state and federal fiscal consolidation is dampening growth. It’s clear that the government is a drag on the economy but so far the economic impact of the mandatory “sequester” budget cuts has not been as adverse as expected.

These developments beg the question: Is the American economy poised for a come back?

It certainly appears that way. The engines are revving, the pistons are well greased with financial liquidity, asset prices are ballooning and wealth creation is back in vogue. Once American consumers press down on the accelerator and shift into forth gear, the global economy will experience the rising tide that it’s yearning for. Barring a major geopolitical shock, a veritable global turnaround is imminent, perhaps in the fourth quarter of this year or early 2014. Let the good times roll.

In an article on CNNMoney, Christ Brightman of Research Affiliates made a compelling case for treading carefully if you are considering joining the US equity markets at this stage (unless of course you are investing for the long haul). You may very well be late to the party. Price-to-Earnings ratios are quite high, earnings per share are already unprecedented (exceeding previous highs), and the Federal Reserve’s QE programme will not be sustained ad infinitum. Eventually the music will stop or the beats per minute will mellow.

Closer to home, many are waiting with bated breath for an update on what the Government of Barbados is doing to put its fiscal house in order. Barbadians are also eager to find out what is in the works to prepare the country to take advantage of the pending rising tide of sustainable global economic growth and prosperity.

A Budget presentation alone will not suffice. Major change is needed in Barbados. The clock is ticking. It’s time for action; action on business facilitation, action on restructuring the operations of government, action on raising the standard of service delivery in all sectors, action on faster judicial settlements, action on simplifying land registration as well as the transfer of property, action on education reform etc.

Enough of the long talk, it’s time for action Jackson! It’s time to stop fiddling while Rome burns.

Once upon a time we could all have been confident that though Barbadians will postpone required action, in times of crisis, we will muster the resolve to act. Judging from the approach to the current economic crisis, I am not so sure if that is still true.

* Carlos R. Forte is a Commonwealth Scholar and Barbadian economist with local and international experience.

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