Markets Doubt the Sustainability of U.S. Growth

The American comeback was initiated with firms accumulating inventory and supported by public expenditure. Now, it’s the use of takeovers. But this is not the case, explains Aurore Wannesson-Raynaud, strategist at AXA Investment Managers.

In May, the American economy saw 431,000 jobs created. Yet, the markets have sanctioned it. Why?

Most of the jobs created have been in the public sector. The majority of these positions have been created for the 2010 U.S. Census. By nature, they are temporary, and those employed will find themselves in the job market at the start of summer 2010. Besides jobs in the public sector, the private sector has only created 41,000 posts in May, which explains the markets’ reaction, because the dynamic of the preceding months has already died down.

If this trend continues, what impact could there be on growth?

The American comeback was started by businesses accumulating inventory. This has helped restart production and thus caused a strong rebound of growth. At the same time, public support, through taxes, automobile programs, the increase of unemployment benefits (in both duration and in amount), and property tax credits have also supported the activity. Today, takeovers are used to create this recovery and get back into a virtuous cycle. But to lower the level of unemployment (9.7 percent), between 200,000 and 250,000 jobs would have to be created monthly. And just to stabilize it, it would require 150,000. But for these 150,000 jobs to be created, it would be necessary to have a GDP growth of around 4 percent. This is why the markets doubt the sustainability of the growth.

In light of your forecast, what monetary policy do you anticipate?

The Fed has already brought its rates to an extremely low level and, at the same time, has injected liquidities and strengthened the markets. Increasing interest rates would be the ultimate stage. The Fed could again raise its discount rate (it already brought it up 25 basis points). This increase could indicate that stress no longer exists on the financial markets. The Fed could also try not to replace maturing securities or even sell the active ones on its balance sheet. This means that there will be no rise in the interest rates before 2011.