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Once past fiscal cliff, U.S. fundamentals are strong

Manufacturing is now expanding in the U.S. and that, along with a housing revival, bodes well for stepped-up job creation. Seen here, Volkswagen's Chattanooga plant.

© Billy Weeks / Reuters/REUTERS

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I have long thought that the next four years would be a gift to the next U.S. president, regardless who won the election, just as the past four years were a nightmare.

Underlying U.S. fundamentals are strong, despite what will be an intense period of contentious negotiation over the fiscal cliff. The U.S. economy still has a long way to go to reach full employment, so there are no capacity constraints or prospects of U.S. Federal Reserve tightening. Instead, pent-up demand is huge and consumer confidence is rising sharply.

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The jobs market has improved, and that improvement will accelerate as the uncertainties associated with the federal budget dilemmas are resolved. By the middle of next year, a fiscal plan will have emerged that puts the U.S. budget on a sustainable path. Hopefully, learning the lessons of Europe, the austerity will be measured.

Housing is finally recovering and construction jobs will be coming back – a powerful stimulant with many ripple effects throughout the economy. House prices are rising and inventories of unsold homes are down. Sales are up as housing affordability has hit its most favourable level in more than 40 years.

Mortgage rates are at extreme lows and mortgage money is more readily available. Household formation is rising and first-time home buyers will be the big winners. Foreign demand for U.S. residential real estate is strong, especially from Canada.

The U.S. trade picture has improved considerably despite a slowdown in Europe, Asia and Canada. The U.S. dollar is down, U.S. labour costs are competitive and technological advance has added to productivity. Important as well, is that U.S. energy costs are low.

The shale gas and oil revolution has fired up an American industrial revival, breathing new life into businesses such as petrochemicals and glass, steel and plastics. Many environmental issues have yet to be resolved, but natural gas prices in the U.S. market have fallen to a fraction of what they are in Europe and Asia. This has translated into significantly lower costs of electricity generation to power industrial plants, reducing the cost of producing solvents, plastics, paints, packaging, dyes, inks, lubricants and many other products.

Manufacturing is now expanding in the U.S. and that, along with a housing revival, bodes well for stepped-up job creation. Employment in the chemical industry, for example, is in the early stages of a major revival. Companies such as Dow Chemical, CF Industries (ammonia and urea units) and Methanex are building new U.S. operations and "reshoring" production.

And with more plastic produced in the U.S., domestically produced toys, household goods, and even computers could replace imports, avoiding the cost of transportation and the risk of intellectual property infringements. Foreign manufacturers are also setting up shop in the U.S. and many more are eyeing the U.S. market as municipalities compete, offering financial incentives to attract large employers.

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Consumers are already stepping up spending after years of belt-tightening and deleveraging. Auto sales and production are strong, retail sales have grown and business confidence will increase with the resolution of the fiscal drama. Today, the boomers are beginning to leave the work force and the participation rate of women has stabilized, so potential growth is probably no more than 3 per cent or somewhat less, but that level of growth will go a long way towards making President Barack Obama's second term a lot more buoyant than his first.

Dr. Sherry Cooper is executive vice-president and chief economist of Bank of Montreal.

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