Hamish McRae: Americans seem to be spending again – that's good news for us all



It is coming up. Our Prime Minister's US visit is about politics, not economics, but he goes to a country that is showing, week by week, more pluses than minuses on the economic front. It is true that recovery remains achingly slow and there continue to be jolts.

The most recent is the continued climb in road fuel prices: gasoline at $4 a gallon is around half of European levels, but as driving is more necessary in the US than here, it unavoidably squeezes family budgets. Politically, gas prices are perhaps President Obama's greatest headwind in facing re-election – not that this is something within the Administration's control.

But there has been another jolt, this time a positive one. The winter has been exceptionally mild. As a result, money normally spent on heating homes has been available for other things. Consumer sentiment had been climbing for several months, pointing to a more buoyant spring and summer in the shopping malls, but now retail sales in February are up more than 1 per cent month on month, the biggest increase for five months. Even stripping out the rise in fuel prices (that $4 gallon) that is still encouraging news.

All this builds on two other positive factors. One is growth in employment, for the great job-creation machine of the US private sector seems at last to be delivering. In the past three months, the US has created an extra 750,000 jobs. Pay is rising, too, having climbed more in the past six months than at any time in the past five years.

The other is the housing market. Prices overall are still flat, maybe even falling a little, but the housing market seems to think that it may be ending its five-year decline this year. Transactions are up, a good early signal of a turn in prices, and the Prudential Real Estate survey shows 70 per cent of homeowners think prices will rise in the next two years.

So the data is pretty positive. So, too, is the feel of the place. I happened to be in Washington over the weekend and, while it is always dangerous to allow one's nose about economic buoyancy or otherwise to lead one's head, the place does feel more optimistic. The streets, the bars, the shops, the little bed-and-breakfast in Annapolis – the whole thing has more of an upbeat air than I recall, say, last autumn. I caught this change of mood in New York just before Christmas; now it seems to be spreading out, rather as you would expect it to do, for New York generally is a leading indicator for the economic mood of the US as a whole.

If this is right, then there will be a number of consequences. One is that it strengthens President Obama's chances of re-election. Expect a great deal more about that in the coming months.

A second, leading on from this, is that the administration's policy in combating the recession will be more appreciated. The people who have jeered at support for the automobile industry, dubbing General Motors as "Government Motors", will have to take on board the fact that the policy seems to have worked. There may also be more support for the huge fiscal stimulus, though that is contentious.

Indeed, there is an interesting debate in the US about the relative effects of the fiscal and monetary policy. Hardly anyone doubts that some sort of counter-cyclical policy was appropriate, but there is a legitimate debate about the relative roles of fiscal and monetary policy. Might it have been better to have had a larger, or at least an earlier, monetary stimulus, coupled with a smaller fiscal one? The inflationary pressures might have been greater but the debt mountain would have been smaller.

We'll see. Meanwhile – and this is the big story – if the US economy continues to recover, then the rest of us will be pulled along, too. And, given what is happening across the Channel, that is most welcome.

Trade shifts in the right direction

You can see the effect US growth is having on us from January's trade figures out yesterday. It is dangerous to read too much into any one set, but they do show what ought to be happening to the economy – the switching of exports towards growth markets. There was a 4.4 per cent rise in goods exports to non-EU countries and a 0.8 per cent dip in those to the eurozone.

Thus, goods exports to the US, China and Sweden were up, but those to Ireland, Spain and, interestingly, also France were down. Within the eurozone, exports to Germany and the Netherlands were up, reflecting the fact that its most competitive bits are doing fine. Finished manufactured goods exports were up and imports down, as you would expect given sterling's devaluation. Overall, there was the usual deficit, actually higher than December, which was unusually low. But net trade is likely to be positive in the first quarter, helping keep us out of recession.

One weakness in the monthly data is that while we know a lot about trade in goods (where we have a deficit), we know far less about trade in services (where we have a surplus). Services are harder to count, so all we have is an overall estimate. But you would expect the same geographical trends, indeed more so, because the balance of service exports is far more towards the US and less to the eurozone. If that is the case, the US revival is doubly good news.


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