Research US: Public – Private Crosscurrents

We believe the economy will finally be able to reach sustained growth above trend. Fundamentals in the private sector have improved. The housing market should be a significant positive factor, and business caution last year has left pent-up demand in investments. Fiscal contraction will weigh on growth, but the fiscal drag is no larger than last year and fundamentals are better.

Consumers have not yet reacted to the significant tax increase imposed in January, short-term weakness is expected in US economic data due to a set-back in consumption. That said, we expect the underlying positive growth recovery to remain intact.

Improvement in the labour market over the coming quarters should initiate a slowdown in the Fed's pace of balance sheet expansion in Q4 this year. This would mark the beginning of the process towards the first Fed funds rate hike but we do not expect the Fed to hike rates before Q1 15.


The US economy is in the middle of a crosscurrent with tailwind from the private sector, but headwind from public sector consolidation. This is a natural consequence of the policy decisions taken during and after the financial crisis. The government and the Fed accepted a significant deterioration in their balance sheets in order to help the private sector to rebuild theirs. This was the first phase on the road to recovery but we have now moved into the second phase.

At the current juncture, the private sector has come far in its balance sheet adjustments. Consumer debt levels have returned to more normal levels, banks have undergone a period of deleveraging (but are now expanding credit again) and the housing market adjustment has come to an end. This leaves room for a gradual fiscal consolidation without risking the economic recovery. All said, the economy still needs help from accommodative monetary policy and we believe the Fed is ready to deliver.

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