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While its too early to call the end of the secular bear
Bullets
market in US shares, there are some signs of light in the US
economy, notably in manufacturing, energy production and
housing.
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Introduction
Starting with the bursting of the technology bubble in 2000,
the fortunes of the US economy have waned. Since then, the
US has seen two recessions with the last being the worst since
the 1930s, a rising trend in unemployment, the bursting of a
corporate debt bubble with the tech wreck and the bursting of a
housing debt bubble with the sub-prime mortgage crisis. So its
little wonder the US share market has been spinning its wheels
in a secular bear market. Some commentators even talk of a
permanent decline for the US.
The high level of US public debt, ongoing private sector deleveraging,
less business friendly policies, demographic trends and the absence
of extreme share market undervaluation suggest the secular bear
market in US shares may not be over yet. That said, it would be
dangerous to write the US off. Many did this in the 1970s only
to see it roar back with a vengeance in the 1980s and 90s. More
importantly, there are some signs of light at the end of the tunnel for
the US in manufacturing, oil production and housing. This note takes
a look at these sectors, focusing on the latter as housing was the
original driver of the global nancial crisis.
US manufacturing renaissance
Recently there have been numerous examples of companies
setting up manufacturing plants or expanding production in
the US over locations in Canada, Mexico, Japan or the emerging
world. These include Maserati, Toyota, Honda, Nissan, Kia, Intel,
Whirlpool and Caterpillar. In fact for the rst time in over 35
years, annual growth in manufacturing employment is exceeding
employment growth elsewhere in the US economy. The key
drivers of Americas manufacturing renaissance are restrained
unit labour costs in manufacturing (which have been unchanged
for the past 30 years), rising wages in emerging countries, the
low US dollar (US$) after a decade long slump, and cheap energy
prices helped by surging natural gas supply. While its early days
yet, Americas manufacturing renaissance has further to go.
US housing bottoming
A collapse in the US housing sector was at the core of the subprime mortgage crisis in the US which subsequently morphed
into the global nancial crisis. US house prices and housing
construction surged into the middle of the last decade as lax
lending standards underpinned a huge surge in home ownership.
Boom turned to bust, starting around 2006 as housing supply
started to surge and it became harder for sub-prime borrowers
to renance their loans. Foreclosures rose, made worse in turn
by rising unemployment as the whole process fed on itself. The
subsequent slump has seen a 34% plunge in house prices. This
has seen the volume of private residential investment collapse
by about 60% from its peak in the mid 1990s, resulting in a huge
drag on US gross domestic product (GDP) growth.
US Housing
Starts, '000
(LHS)
2000
1500
1000
500
0
88
90
92
94
96
98
00
02
04
06
08
10
12
80
70
60
50
40
30
20
10
0
Thousands
Total vacant
houses
10000
30
25
20
15
10
5
0
-5
-10
-15
8000
6000
Long-term trend
4000
2000
65
70
75
80
85
90
95
00
05
10
70
75
80
85
90
95
00
05
10
1991
2003
2007
2011
5
4
04
05
06
07
08
09
10
1995
1999
2003
2007
2011
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1
02
Australian house
price to rent ratio
% Dwellings in
foreclosure (RHS)
01
00
1999
99
1995
1991
98
US house price to
income ratio
60
50
40
30
20
10
0
-10
-20
-30
11
10
9
8
7
6
5
4
3
US house price to
rent ratio
Thousands
65
11
Finally, housing affordability has reached a record level. While this has
not been acted upon given the excess supply of housing and tough
economic conditions, we are likely to see greater demand for houses
as the excess supply dwindles and economic conditions improve.
US housing affordability is at record high
200
180
Concluding comments
While the secular bear market in US shares that began 12 years
ago may have further to go, there are a number of positives
suggesting there is light at the end of the tunnel. In particular
the US housing sector appears to be bottoming.
Dr Shane Oliver
Head of Investment Strategy and Chief Economist
AMP Capital Investors
160
140
120
100
80
60
70
73
76
79
82
85
88
91
94
97
00
03
06
09
12
Contact us
Important note: While every care has been taken in the preparation of this document,
AMP Capital Investors Limited (ABN 59 001 777 591) (AFSL 232497) makes no
representation or warranty as to the accuracy or completeness of any statement in it
including, without limitation, any forecasts. Past performance is not a reliable indicator
of future performance. This document has been prepared for the purpose of providing
general information, without taking account of any particular investors objectives,
nancial situation or needs. An investor should, before making any investment
decisions, consider the appropriateness of the information in this document, and
seek professional advice, having regard to the investors objectives, nancial situation
and needs. This document is solely for the use of the party to whom it is provided.
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