JP Morgan: The US Recovery is About to “Hit a Pothole”

By Walter Kurtz, Sober Look

As discussed earlier (see post), US manufacturing sector has begun to recover. Manufacturing orders in the US as well as in Emerging Asia (see post) have diverged from other large economies. This trend is becoming reflected in the broader economic activity.

However according to JPMorgan, the result of the latest fiscal negotiations will soon create headwinds for this expansion and dampen GDP growth. The tax increases on  higher income households as well as the hike in payroll taxes will crate a drag on growth. That in turn will limit global economic activity.

JPMorgan: – Regionally the US and Emerging Asia are leading the move up in our global surveys. In the US, early December labor market reports and consumer indicators reinforce this message. Unfortunately, the economy is about to hit a pothole as the household sector absorbs a large front-loaded drag resulting from the fiscal cliff agreement. The increase in payroll taxes and higher marginal rates on high-income households is set to depress 1H13 income growth by roughly 2%-pts at an annualized pace. 

Source: JPMorgan


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Sober Look

Sober Look

Sober Look was founded by Walter Kurtz, a New York based hedge fund manager and credit markets specialist.

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  • Andrea Malagoli

    The problem always remains that not all recoveries are created equal. Just extrapolating the trends in e.g. manufacturing provides no information if one also does not extrapolate trends in debt. The neoclassical view of macroeconomics is to just focus on economic indicators regardless of debt. However, it is very easy to create the illusion of a recovery by throwing some sort of money into it (printed or borrowed), but then we know what happens.

    Just as a matter of prudence, it is worth remembering that economies hardly ever just “grow” out of excessive credit cycles.

  • Dar

    Consumptions from upper incomers likely be limited, as they have purchase way too many goodies. End of payroll tax cut could reduce consumption more.

    If someone sees no return on investment, even 0% interest won’t entice him to borrow. Many US companies hold cash simply because of overcapcity in many areas cause they find no opportunities to invest and make money. Make credit more available from Fed won’t help.

  • Dar

    Not just US, Chinese government is also hesitate on reform. Reform is very painful and may cost politicians’ career and even lives. Continue supply cheap credits to build factories for export will bring big probelm for China (future factory close, bank run, ..etc.).

    Recent conflict with Japan is very unwise. Just last year, China and Japan reached agreement for Forex exchange so they can trade bypass US$. China should grow this program. Acutally, China was quite flexible in territory dispute in past – just a decade ago, it settled with Russia on historical territory dispute by gave up huge territory claims.

    I don’t see recent China PMI increase is a good news. As US politicans, they don’t bite bullets.

  • fin

    To be fair, Japan made the unwise move first. Actually too much attention has been put to Chinese economy, Japanese economy now actually is becoming more interesting.