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Could the U.S. derail the global economic recovery that's finally taking hold? Could we be the ones who drive the Dow Jones Industrial Average (DJINDICES: ^DJI ) off the path higher that we've experienced all year?
That's what the Organization for Economic Co-operation and Development, or OECD, said in an Economic Outlook report issued on Tuesday. Instead of being worried about Europe or China, we should actually be worried about Washington, D.C.
The OECD's crystal ball
Part of the OECD's report predicts global economic growth, and on that front it expects slower growth both this year and next. The forecast now stands at 2.7% growth for 2013 and 3.6% for 2014.
The immediate concern comes from the U.S., where the OECD says two government entities may cause a pullback in growth.
First, the bickering that erupts in Congress when the debt approaches has hurt the confidence of investors, businesses, and the international community. In its report, the OECD called for a "credible long-term budgetary consolidation plan with solid political support." I'm sure Washington, D.C. politicians are listening.
Second, there's concern that the U.S. economy will slow when the Federal Reserve begins tapering its $85 billion per-month program of bond purchases.
Where's the money going?
Is this a credible concern? Forecasts are almost always wrong in economics, but it's worth exploring further.
We know the U.S. has vastly outgrown other developed countries going back 10 years. You can see below that U.S. GDP growth in that period is nearly double that of Germany, France, and the U.K.
What the OECD is arguing is that Europe is finally getting over a budget-driven recession and will now begin growing at a higher rate. At the same time, stimulus is going to be pulled from the U.S., and politicians will only make the problem worse.
I'll point out a few counterpoints to that argument. First, businesses and investors were once worried about dysfunction in the U.S. capital, but that concern has eased in recent years. The deficit is expected to be about 4% of GDP this year, which isn't far from a sustainable level. Plus, the markets have essentially stopped listening to threats in Washington D.C., understanding that neither side of the political divide is really willing to default on our debt. The common belief is that a last-minute agreement will be reached every time the debt ceiling nears.
Second, I don't think money will suddenly leave the U.S. once the Fed pulls back on stimulus. American corporations are holding $1.48 trillion of cash, according to Moody's Investors Service, which means they aren't exactly spending freely even though interest rates are low. Just because rates rise a little doesn't mean companies will pull back on spending immediately, especially if they see opportunities for investment.
The OECD said the U.S. poses risks that could derail a global economic recovery, and it's right. But the truth is that risks exist around the world and there are many reasons to be bullish on the U.S. right now.
I'm not selling stocks because of this report, and I don't think the Dow Jones Industrial Average is due for a fall, either. Take these economic reports with a grain of salt, but use them as a counterpoint to your own opinions. In another year we'll know whether the OECD is right or whether investors should still be bullish on the U.S.
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