LGIM: Domestic demand to insulate US economy

The US should remain insulated by strong domestic demand, as long as the turbulence in commodity markets and the emerging economies does not feed through into a broader tightening of US credit conditions according to Legal & General Investment Management (LGIM).

During LGIM’s monthly Fundamentals briefing, Economist James Carrick considered the US economy – the current mainstay of global growth – and assessed whether it could be affected by volatile global economic conditions. He concluded that,

“If falling unemployment means credit conditions continue to ease, then the US domestic economy should be strong enough to offset the drag from emerging economies and the strong dollar.”

James emphasised, however, that there are a number of scenarios where the US economy could weaken and the Federal Reserve would be likely to delay further interest rate hikes.

“If a surge in commodity-related corporate defaults hampers the ability of ‘good firms’ to raise finance, then the US economy would be vulnerable. Emerging country economic growth could also be weaker than we assume. A further slowdown in Chinese growth could easily push the global environment towards recessionary levels.”

In addition, James believes that concerns over the corporate bond market might warrant a more cautious stance from the Federal Reserve.

“Given the increased importance of corporate bond issuance in recent years, the weakening of the high yield bond market poses downside risks to credit conditions and economic growth this year. This, combined with continued weakness in emerging economies, suggests that the Federal Reserve should act cautiously if financial markets remain volatile.”

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