Despite weaker-than-expected U.S. employment data for May (released June 1) and other signs of slow economic growth, the Fixed Income Macro Strategy Team at American Century Investments does not believe the U.S. economy is headed toward another recession (though the marginal possibility of recession has increased). Rather, the team believes the economy remains on a sub-par recovery/slow (1-3%) growth path, with headwinds.

Last fall, on the American Century Investments Blog, Fixed Income Chief Investment Officer G. David MacEwen described the growth dichotomy that had developed between the consumer and business sectors of the U.S. economy (“Outlining the U.S. Economy’s Growth Dichotomy,” October 25, 2011). Basically, businesses (especially bigger, multinational firms) had bounced back from the Great Recession of 2007-09 faster and stronger than the average U.S. consumer who buys their goods and services. Six key causes for the growth dichotomy (three each for businesses and consumers) were:

For businesses

• Corporate cost-cutting—particularly employee layoffs and reduced benefits.
• Business productivity gains—efficiency gains through technology and management improvements.
• Global economic expansion—particularly in emerging markets such as China.

For consumers

• High U.S. unemployment—slow to recover from the Great Recession.
• Depressed U.S. housing market—likewise, slow to recover from the Great Recession.
• Consumer debt conditions—tighter lending requirements and restrictions.

Since October 2011, global business and U.S. consumer conditions have moved more in concert. We believe this has reduced the influence of the growth dichotomy. The growth dichotomy is shown below, measured by the Fixed Income Macro Strategy Team’s proprietary sector scores, part of the team’s monthly economic and market analysis processes. The scores reflect aggregates of various business and consumer indicators.

Note that since 2008, the business and consumer scores have moved roughly within ranges near the “average” (3.0) line—well above recession levels, but not breaking out to what we would consider more typical post-recession recovery levels (especially on the consumer side). Following such a severe recession, the recovery could have been much stronger.

But the recovery has been hampered by lingering aftereffects of the recession and by uncertainty. The uncertainties this year are particularly focused on the European Union, the U.S. presidential election, the Middle East, and in addressing government budget deficits, which could change economic conditions and trigger market instability.

In this environment, we continue to believe in a disciplined, diversified investment approach that incorporates professionally managed fixed income holdings, with durations matched to investment time horizons—the shorter the time horizon, the shorter the portfolio duration of fixed income holdings.

American Century Investments^® offers a wide variety of stock, bond and asset allocation funds. Visit americancentury.com for more information: U.S Investment Professionals

The opinions expressed are those of American Century Investments and are no guarantee of the future performance of any American Century Investments portfolio. This information is not intended to serve as investment advice; it is for educational purposes only.

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