Presidential winner faces stalled economy

United States opinion polls show a tight race between President Barack Obama and Republican challenger Mitt Romney, but leaning towards a win by the president tomorrow.

The markets seem to be favouring a President Obama win because it will mean less uncertainty, but a "Romney rally" was yesterday being offered as a one-in-three possibility.

There is a conventional line being offered that says a victory by long-time businessman Mr Romney will be better for the equity market, given his predilection for fewer regulations and lower corporate tax rates.

Any move will be limited as the US economy is facing some major problems during the rest of the year.

The US economy remains stuck in the mud, according to Westpac chief economist Dominick Stephens.

Four out of four regional factory surveys turned negative in October. While the unemployment rate fell below 8% in September, most of the post-Global Financial Crisis improvement in the unemployment could be explained by falling labour force participation, he said.

For its part, the Federal Reserve remains singularly focused on jump-starting the economy, starting the third round of quantitative easing in September.

"The latest round of money printing extends the type of securities the Fed purchases to promote lending by financial institutions. The thrust of all this is designed to stimulate asset markets - housing and equities - in the hope that increases in wealth will increase confidence and then activity," Mr Stephens said.

With the outcome of the US presidential election likely to be known late tomorrow night, reports from the US say the housing market is on the mend, but the "missing piston" of the world's largest economy does not have enough power to get the broader recovery firing on all cylinders any time soon.

Typically, housing leads the US economy out of recession.

But the vast equity losses have stymied the market this time, Reuters reported.

Construction and related activity would help US economic growth this year for the first time since 2005, before the housing bust helped push the US into recession, triggering the GFC.

Higher sales, prices and building, albeit modest so far, are a welcome boost, as other drivers of the economy falter.

But housing still accounts for only a small part of gross domestic product (GDP) compared with the boom years.

US homeowners, like those in New Zealand, remain wary of taking on debt. Most prefer to save for renovations rather than borrow. Economists said housing-related jobs have grown by an average of 11,000 a month this year. That contrasted with an average monthly decline of 1000 in 2011 and they should speed up to 30,000 a month by early next year as new home construction increased.

Mr Stephens said the housing market was offering some hope but a long and slow deleveraging slog remained in front of both households and the Government.

The incoming US President would face economic challenges in every direction.

The "fiscal cliff" - a swathe of automatic tax increases and spending cuts that take effect if no agreement is reached on how to balance but budget - had the potential to un-nerve financial markets temporarily.

"The way ahead for fiscal policy is the more formidable challenge as trimming the $US16 trillion [$NZ19.4 trillion] deficit without derailing the economy will be a delicate balancing act."

According to the Congressional Budget Office, automatic spending cuts which would come in if US lawmakers did not come to an agreement would cause the US economy to contract at a 1.3% annual rate in the first half of 2013, pushing the US economy into recession.

Finance chiefs of leading economies pressed the US yesterday to avert a rush of those spending cuts and tax hikes that could hurt global output next year.

Unless a fractious Congress can move quickly to reach any deal after the election, about $US600 billion ($NZ727.4 billion) in government spending cuts and higher taxes start on January 1.

"They will need to act swiftly on the fiscal cliff and then they will need to put in place a medium-term fiscal consolidation," Australian Treasurer Wayne Swan told Reuters before ministers from the Group of 20 countries gathered for talks.

ASB economist Jane Turner said Republican challenger Mitt Romney had already indicated he would not grant current Fed chairman Ben Bernanke a second term.

Instead, Mr Romney was likely to install a chairman who was considered to be more "hawkish".

That would mean a stronger focus on inflation, potentially placing less emphasis on the lower unemployment objective.

"Overall, it would suggest tighter monetary policy in the US," she said.

Regardless of the results of the election, the next four years will be a tough act to follow from a Wall Street standpoint.

The benchmark Standard and Poor's 500 index has rallied 66% since Mr Obama took office - one of the most impressive runs ever for stocks under a single president.

Admittedly, the timing of his inauguration of just before the market hit a low point of in March 2009, is part of the reason.

The Fed has used three rounds of asset purchases, one of which is under way, to keep interest rates slow and stimulate the economy as the recovery from the 2007-09 recession has been painfully slow.

The Fed's current policy stance is seen as helping Mr Obama. Consumer confidence recently rose to a more than four-year high.

dene.mackenzie@odt.co.nz

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