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Why the US needs fiscal stimulus

After the shocking US ISM manufacturing and non-manufacturing PMI results for August a number of grim looking charts on the US economy have popped up on my feed. It's worth reflecting on these charts as you can't simply dismiss the softness of the data despite a still constructive set of conditions for the US economy more broadly.

1. Fiscal policy has turned contractionary

2. Small business has been doing it tough

3. The latest PMI results point to much slower GDP growth

4. US economic surprises have slipped from positive back to negative again

5. Federal tax receipts have plunged

6. US leading indicators are softening

7. CEO confidence has been declining

8. Economic policy uncertainty has been rising

Clearly these are the types of charts you use to make a case for an imminent recession, and there are weak spots in the US economy. There should be weak spots as the strong US dollar has tightened financial conditions and made life tough for exporters and those competing with importers. The collapse in the Shale oil industry has also caused pain within the energy sector and with some spillover. Weakness in emerging markets and political risk domestically and abroad has also been a source of uncertainty.

At the same time the US consumer has been doing fine, and for a consumer oriented economy that's the key. The US consumer is seeing: wage growth, jobs growth, lower borrowing costs, rising house prices, cheaper energy costs, and more recently better performing financial asset prices. Given these fundamental drivers of strength for the US consumer it's hard to see the US economy falling into recession, even if a few parts of the US economy come under pressure.

Given the weak spots vs the strong consumer it means more of the same of constrained growth and low inflation, to be sure growth is certainly fragile, so the Fed needs to move slowly and where possible the US government needs to be careful with fiscal policy - tighter fiscal policy is not what an economy with weak spots needs, and it is not what a demand-deficient world needs. So it's a good sign that the debate has already shifted from "see who can cut the deficit the most" (Romney vs Obama) to now "see who can invest the most in infrastructure" (Clinton vs Trump).

Bottom line: there are a number of weak spots and warning signs in the US economy, thankfully it is not consumer driven and the consumer still enjoys a number of tailwinds, but fragile and constrained economic growth needs fiscal support.

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