Despite some conflicting data and high oil prices, the US economy's recovery should keep going into 2005. The main reasons for a recent slowdown in consumer spending and job creation were higher oil prices and the wearing off of tax cuts, but forward-looking indicators suggest that the economy will show renewed strength.

Business and consumer confidence has improved, while US companies are continuing to generate good profits, which should mean that they keep investing and taking on new workers. Inventories are also very low in relation to sales.

It is also likely that the worst of the "shock" from high oil prices has occurred already, and though the resulting rise in inflation may depress economic growth it is probably not enough on its own to bring the US upswing to a complete halt. And if oil prices keep on rising, the Fed could always stop hiking up interest rates. That would lead to a fall in US bond yields, limiting the economy's downside.

Reasonable employment growth and a continuance of good income growth should boost consumer spending again, so we expect US real GDP growth to accelerate to between 3.5% and 4.0% a year during the second half of 2004, up from 3% a year in the second quarter.

Little room to manoeuvre
The US economy does seem headed for a slowdown in growth in 2005, however, probably back towards 3% a year. The massive fiscal expansion of the last four years, worth some 4% of GDP in stimulus, is now coming to an end and, as well as no more tax cuts, the special investment breaks for companies will also finish at the end of 2004.

THIS ARTICLE IS REPRODUCED COURTESY OF SMART INVESTOR MAGAZINE