Investment Insights Dezember 2011 - DWS Investments

The US in 2012: it’s all about confidenceLarry V. AdamEconomic growth of 2– 2.5 percent expectedin 2012, but substantial domestic and externalrisksFederal Reserve can implement further nontraditionalpolicy stimulus if necessaryOur base case scenario is that the US grows at 2– 2.5 percent(Figure 1) in 2012, having picked up pace in Q3 2011, butsubstantial domestic and external risks remain. Uncertaintymeans that our market forecasts must be muted, if positive,too. 2013 could, in fact, prove to be worse than 2012, as theeconomy is simultaneously hit by the “automatic”Congressional budget cuts, the expiration of the Bush taxcuts, the likely end of the 2 percent payroll tax cuts and theintroduction of taxes tied to healthcare reform.ChallengesWhile a recession is likely avoidable in 2012 – thanks to strongbusiness spending, robust exports to the emerging markets,positive job growth and some politically-driven initiatives inan election year – the US economy will not be without itschallenges. The most immediate domestic risk is a tampingdown of consumer and business confidence by economic,political and international uncertainty. Depressed consumerconfidence could lead to reduced consumer spending andheightened risk aversion while weak business confidence couldlimit job creation: together, they could lead to a self-fulfillingrecession.Forecast US growth in 2012 – quarter-on-quarter, annualizedin percent, quarter-on-quarter, annualized3.53.02.5Retail sales have been resilient so far, despite poor consumerconfidence, but this situation cannot continue indefinitely. Weakwage growth would be one factor holding back a recoveryof consumer confidence, and we are concerned that the labormarket will remain tepid in 2012, with the unemployment rateremaining above 8.5 percent.Another – linked – risk to sustainable US economic growthis the still poor state of the US housing market. A weakhousing market stifles economic growth as job seekers arenot able to move to take new jobs (because their existinghome is difficult to sell, or because negative equity meansthat selling it would crystallize a loss that they cannot fund).Moreover, declining house prices can trigger a negative netwealth effect, reducing consumer spending; further declinesin home prices would of course also put the banking sectorat risk of further write downs. It is becoming increasinglyevident that some sort of government intervention in thehousing market may be necessary, something that mightappeal to the current administration in an election year –although its ability to implement stimulus measures wouldbe limited by the US’s debt and deficit situation.Policy responseIf the US economy were to show substantial signs of stress,we believe that the Federal Reserve would be inclined to engagein further quantitative easing. Fed Chairman Bernankecontinues to make it clear that he will use all policy measuresto avoid a recession. With headline inflation pressures likelyto subside, helped by recent falls for many commodity prices,the Fed should have ample room to implement further nontraditionalmonetary policy initiatives, and they may be in theform of mortgage-backed security purchases in order tooffer more aid to the housing market. Declining inflationarypressures will also allow the European Central Bank andemerging market central banks to cut interest rates as wellto stimulate their economies.2.01.51.00.50Q3 2011* Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012*ActualFigure 1 Source: Deutsche Bank, Global Markets. As of November 29, 2011Past performance is not indicative of future returns. No assurance can be giventhat any forecast, investment objectives and/or expected returns will be achieved.Investment Insights December 2011 Page 11