US sluggish growth prevents QE tapering

The U.S. economy is undergoing an "unremarkable" recovery with economic data between June and September disappointing, leading the Federal Reserve to delay Quantitative Easing (QE) tapering, a senior economist said. The prospect of QE tapering primarily depends on incoming economic data, Michael Hanson, a senior U.S. economist with Bank of America (BOA)Merrill Lynch, said during an interview with Xinhua on Wednesday. Hanson, who was in Beijing to attend BOA Merrill Lynch China Conference 2013, expects the Fed to discuss QE tapering early next year. "I think January and March could be the most likely, in those two (Federal Reserve) meetings. But it really depends on the economic data." The Fed's September decision to delay QE tapering took the market and analysts by surprise. Hanson, who has nearly 20 years of experience as an economist in financial markets, the Federal Reserve system and academia, claimed his team was one of the few who predicted the Fed would not start QE tapering in September. "The reason is actually quite simple... If you look at what happened in the (U.S.) economy from June to September, it disappointed to the downside, based on much of the data that came in." The U.S. economy was unable to churn out data that matched the forecasts, and the Fed was forced to revise down its own growth forecasts in September, he said. It would be unthinkable for the Fed to say "we acknowledge the economy is not doing as well as we have thought, and therefore we are going to taper," Hanson told Xinhua. For the last four years, U.S. economic growth has been sluggish, increasing by around 2 percent. Hanson forecast the U.S. would grow just above 2 percent in the third quarter this year, and around 2 percent in the fourth quarter. For 2013, he expected the economy to grow 1.5 percent year on year. But next year, in Hanson's view, will be a different story. A number of factors are expected to contribute to potentially better growth in 2014, including smaller fiscal drag and pickup in demand from the housing and the auto sectors, he said. He forecast the U.S. economy would, on a quarterly basis, expand by 3 percent or better from the second quarter next year. The U.S. economy is likely to grow by 2.7 percent in the whole of 2014, he said. Hanson also expected the Fed to taper much more gradually if it decides to do it. The market thinks it will take the Fed maybe six months to conclude QE, but Hanson maintained that should the Fed start tapering in January, it would not be completed until the fourth quarter of 2014. "So it would be much more gradual, and that would give some cushion to the market expectations. So there won't be a knock-on effect," he said, adding that the likely impact of tapering on the global economy would not be quite as adverse as some people imagine. For ordinary people to understand the U.S. economy and its recovery, Hanson suggested the single most important thing to do is to keep eyes on the U.S. labor market. "If you are going to have a sustained and broad-based recovery, you need to see the labor market improve in the U.S.... From the very deep recession point, there has been a rather slow recovery on that front (in terms of job loss)." Between 8.7 and 8.8 million jobs were lost from the U.S. job market's peak at the end of 2007 to its lowest point in February 2010. Since then, the U.S. has gained back about 6 million jobs, but there is still a 2-million-job gap, according to Hanson. The other important indicator that people need to track is the housing market. There was a notable improvement in the housing market, but a full recovery will take a number of years, he said. Regarding the U.S. political row over the fiscal budget and the debt ceiling, Hanson believed that it would be "extremely unlikely to see a shutdown of the U.S. government" after Jan. 15. The U.S. Congress approved a deal on Oct. 16 to fund the government through to Jan. 15, and raise the debt ceiling until Feb. 7, after weeks of bitter fiscal fighting and 16 days of federal government shutdown. "Both parties were damaged politically the last time, particularly the Republicans in the polls.... I don't think we will see that again," he said. "Instead, we will see both sides trying to find a more agreeable solution that doesn't end up with shocking the market."