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Contagion immunity 

23 December 2014 By Daniel Indiviglio

The United States may finally have the recovery it’s been waiting half a decade for. Just a few months ago, risks from abroad felt worrisome. They now pale in comparison to the tailwinds, provided by robust growth and hiring. If housing finally ticks up, even scheduled interest rate hikes look easy to shake off.

The world’s largest economy hadn’t exactly soared in recent years, barely staggering over the 2 percent growth line in 2012 and 2013. But after a rough first quarter with the economy shrinking by 2.1 percent, due mostly to bad weather, the following two quarters averaged an impressive 4.8 percent growth pace.

The employment picture has also brightened, with November seeing the most new jobs in any month since early 2012, and the strongest six-month trend since 2000. Those workers are seeing better wages too: inflation-adjusted disposable incomes rose 3 percent in November compared to a year earlier, the best since 2012.

America’s growth prospects look better than for most high-income countries. The World Bank estimates euro area and Japanese growth below 2 percent in 2015, and barely exceeding 1 percent this year. Yet even if U.S. net exports had been flat in the third quarter, its growth pace would have exceeded 4 percent.

Geopolitical risks, such as Russia’s aggressive stance with Ukraine or Islamic State militants in the Middle East, haven’t dampened U.S. growth or boosted energy prices. To the contrary, oil prices have declined dramatically to provide the cheapest gasoline in five years. The market appears to have shrugged off Ebola fears as well, with no recent news of Americans contracting the disease.

As more Americans find jobs, pent-up household formation may also be unleashed. Housing barely contributed to the robust 5 percent GDP growth pace in the third quarter. If it finally picks up, that could keep growth rising even as other sectors simmer down.

The Fed hiking interest rates by mid-2015 will make borrowing more expensive but also boost banking industry margins. As long as the United States remains a global safe haven, foreign investor demand will soak up much of what the Fed leaves behind.

Then, there’s politics. The new Republican Congress might spell continued gridlock, but a static regulatory framework isn’t a terrible fate for the private sector. And if functional, Washington could even provide businesses some relief through tax reform. While unforeseen risks always lurk beyond the horizon, the U.S. economic upswing looks poised to continue in 2015.

This view is a Breakingviews prediction for 2015. Click here to see more predictions.

 

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