Batten down the hatches: Main St. braves the storm

THREE months after the debt ceiling wranglings on Capitol Hill that drove S&P to downgrade America’s AAA rating, there have been some chinks of light shining through the grey clouds that until now have enveloped the US economy. Figures released last week by the US Commerce Department indicated that the US economy had grown by an annualised rate of 2.5 per cent in the third quarter. So has the US weathered the storm, and come out of the other side with its economy battered, the rigging of its financial sector shorn from the mast, but otherwise sea worthy? Or is it only a matter of time before it is sunk by holes below the waterline?

Throughout the debt ceiling deadlock, the threat of a US default – and the many months where non-farm payroll figures indicated dire employment figures, Kully Samra, UK branch manager for Charles Schwab, remained bullish about the long-term US outlook. “We now feel that our outlook has been vindicated,” says Samra. He has long argued that, while the macro picture has looked gloomy, the microeconomic data has been positive. But he now feels that the macro outlook is looking positive too: “We had a strong second quarter earnings season, strong figures from the Philly Fed. People forget that we had the terrible weather at the start of the year, the effects of Japan on the supply chain. But looking at the ISM figures, both industrial and manufacturing, we haven’t dipped below 50.” If you have been prepared to take a contrarian view over the course of this year, there have been bargain buys available.

THE LARGE MAMMAL IN THE CORNER
Despite this bullish perspective, it’s difficult to ignore the star spangled elephant filing his nails nonchalantly in the corner of the room. The fact remains that the US government has done nothing to address its mammoth debts and its unsustainable deficit. Jefferson County, Alabama, remains on the cusp of chapter nine bankruptcy. If it were to cave in, it would be the largest municipal bankruptcy in US history and it is viewed by many as the first domino in a long chain. Held by many non-sophisticated investors within pension funds, the municipal bond problem has the potential to cause a lot of pain to the US public.

OUTSIDE OF POLITICS
But figures show that the US public is still spending, despite the horribly high levels of unemployment and underemployment. So how big is the separation between the politics inside the DC beltway and what is happening on Main Street? “There are a lot of people who have been experiencing malaise,” says Matthew Hurtt, a political fundraiser in Washington DC. Traveling from the bubble of the District back home to Tennessee, Hurtt says he feels the difference between “the sky falling in” atmosphere in the capital compared to the rest of the US. There is lots of pain but “people are just getting on with their jobs, going out, spending money. We’ve been hearing all this since 2008, and people are just getting on with it.”

A strong rally in the S&P signalled that the US has its rose tinted spectacles well and truly in place. But how long will it last and what lies beneath the waterline?