"Standard & Poor's raised its outlook on the U.S. credit rating to 'stable' from 'negative' on Monday, giving a vote of confidence to the U.S. economy…" (See WSJ article.)
"S&P cited the economic resilience and monetary credibility of the U.S. as factors that drove the brighter outlook. There is now a less than 1-in-3 chance of a downgrade in the near term, the ratings firm said as it maintained its double-A-plus credit rating."
Fitch declined to comment on the move by S&P, while Moody's (MCO) indicated in an emailed statement that it will "likely" raise its negative outlook on the U.S. to stable.
As far as we can tell, the move by S&P indicates a feeling on the part of the rating agency that the United States is moving in the right direction, economically and financially. S&P, along with Moody's, indicates that there is still a possibility that the credit rating of the United States could still be downgraded again later this year, but for now… the outlook for the country has ceased to be so dark.
Good news… in a negative way.
The thing that continues to surprise me is that a lot of people still seem to believe that the economic growth of the United States is going to pick up and we are going to move into a real explosion of output expansion. The expectation seems to be that at sometime in the future economic growth will take off and start to look like some previous economic recoveries.
The year-over-year rate of growth of the United States economy in the first quarter of 2013 was 1.8 percent. In the first quarter of 2012, the comparable figure was 2.4 percent, and this was preceded by 1.8 percent and 1.9 percent year-over-year rates of increase in the first quarters of 2011 and 2010, respectively.
The Paul Krugmans of the world say that this mediorce performance is due to the fact that there is too much austerity all around… that governments need to provide unlimited amounts of fiscal stimulus to their economies in order to get the economy going again.
This analysis comes in the face of perhaps the loosest monetary policy on record.
Of course, the Krugman argument about the ineffectiveness of the current efforts of the monetary authorities is that the economy is in a liquidity trap, which negates the efforts of the Federal Reserve, and means that achieving more rapid economic growth can only be attained by more and more fiscal stimulus.
The people at S&P, however, believe that the economy is growing and that it is not likely that economic growth will become slower or even move into negative ground. The people at S&P seem to think that economic growth is, more or less, in a holding pattern.
The economy is growing. Unemployment is slowly declining. And, the United States government's budget situation is improving. All these point to a more stable situation than the one that existed when, last July, S&P downgraded the credit rating of the United States.
The news on the S&P move came out, and the stock market ended up mixed. The yields on long-term U.S. government bonds rose modestly. And the value of the United States dollar rose slightly in foreign exchange markets.
The response of the markets to the S&P announcement? Ho-hum…
The United States economy and the fiscal position of the United States government, I believe, is relatively better than it was a year ago and that this supports the argument that the credit rating of the United States should be modestly improving. Evidence for this, to me, comes from the foreign exchange market and what I believe is the most important indicator of the relative strength of the U.S. economy -- the value of the United States dollar.
In the accompanying chart, one can see that the value of the U.S. dollar has increased since September 2012. For nine months now, the value of the U.S. dollar against major currencies has risen.
In recent weeks, there has been a small downward adjustment as participants in world financial markets have moved back into European sovereign debt. The underlying sentiment seems to be that the European situation has stabilized and money that had fled to the United States Treasury market and the German bund market could move back into riskier European debt. I presented my views on this movement in the recent post: "U.S. Treasury Bond Yields: Are International Investors Crossing Into New Territory?"
The relative strength of the U.S. dollar over this time period indicates, to me, that the world believes in the growing strength of the United States economy. This belief, however, does not mean that economic growth in the United States is going to become much more robust. It does mean that economic growth in the United States is going to continue along as it has over the past four years as it re-adjusts to re-align the dislocation of resources that exists within the country.
Right now, I think that international investors are fairly comfortable with where the United States economy is, and can live with the disconnect that exists within the governing bodies of the United States government. It doesn't mean that everything is all right. It just means, I believe, that the downside is less probable now than it was a year ago.
There are still many problems in the United States that have to be worked out. There are still many, many problems in Europe that must be worked out. And, there is some indication that the Chinese economy may be experiencing slower growth.
But, the economy continues to limp along. I believe that the people at S&P believe this and are translating this feeling into its rating. The response to the change in status can be looked on as unexciting… as ho-hum…
And, I believe that the economy will continue to limp along until the dislocations that now exist are worked out. I don't believe, as Paul Krugman does, that additional aggressive fiscal stimulus can change the speed at which the economy is progressing. In fact, additional aggressive fiscal stimulus could just result in a further delay in getting all the dislocations worked out of the economy.
It has taken us four years to get here. I believe it is going to take several more years to complete the job. So the people at Standard & Poor's may have it right: the United States economy is not as bad as it was one year ago.