Dominic Wallington: The US has come back off the ropes

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The Independent Online

It's Kinshasa 1975 and Norman Mailer, covering the lead-up to the big fight, reports that George Foreman keeps his hands "in his pockets the way a hunter lays his rifle back in its velvet case". Muhammad Ali is thought by many to be nervous and out of shape. In the fight he allows himself to be pushed into the corner early on. For most of the time he is on the ropes and being pummelled by Foreman.

In the last three years of the 1990s the US economy had the swagger of a young Ali, but by the start of the new millennium all the praise had turned to doubt. Suddenly it seemed ill-prepared for the challenges ahead. The economic miracle appeared intact until it became clear that most of the GDP growth in the first quarter of 2000 came from higher investment spending. As soon as investors realised that the TMT gravy train had come to a shuddering halt, this spend was abruptly cut off, throwing the economy off the rails.

The only prop for growth was the robustness of the consumer. But popular perception suggested that the US consumer's behaviour had been morally corrupt, that the spending was an overindulgence and was bound to implode. The outlook for the economy was bleak, with trillions of dollars lost in the stock market, wild overinvestment in key industries and a view among many that the household balance sheet was, like Ali, in poor shape.

The bears made parallels with the late 19th century, when extensive investment cycles, prompted by new technology like the railways, led to excessive speculation and long downturns. Essentially, the US was on the ropes now and every piece of news delivered a fresh blow likely to topple the global economy

These fears were followed by more company-specific problems. A decade of easy expansion meant many management teams weren't able to cope with a downturn, and the application of somewhat lax accounting suddenly began to come to light. As soon as business momentum slows, the structural problems become evident. They can only be solved after a period of management navel-gazing and corporate cleansing.

Everything pointed to the humbling of the great US economy, and the prognosis was that recovery would be a long time coming. And yet it seems to have had the shortest recession in its history. The consensus is now in favour of a mild bounce-back, with the main fear being that growth will be anaemic. US consumers have acted rationally, flocking to the discount retailers and taking advantage of low rates to refinance their mortgage debt.

The main surprise now may well be that the recovery is firmer than expected, rather than weaker. The inventory correction in the fourth quarter was substantial, and somewhere along the line the empty pipeline has to be refilled. There are still risks: the TMT sector will take longer to recover than most expect, and Japan looks horrendous.

In round seven Foreman tired. He had hit Ali with everything, yet Ali began to come off the ropes and hit back. It became clear he had fooled Foreman with a fear in his eyes he had never felt in his heart. In round eight Foreman was knocked out. Ali was champion again. Many think the blows he took in that fight were the key to the Parkinson's disease he suffers from now.

It will be fascinating to see if we will look back at the recession that nearly wasn't and realise that it was at this time that problems were being stored up for the future. But in the meantime perhaps we should enjoy the possibility that growth will beat expectations.

Dominic Wallington is a UK equities fund manager at Invesco Asset Management.