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Our Outlook for the Economy

Even as some fret about Fed actions behind the curtain, the U.S. economy is finding its own strength.

Robert Johnson, CFA, 06/26/2013

--The roots of the U.S. and world economic recoveries go well beyond a loose Federal Reserve.

--Oil, housing, advanced manufacturing, improved balance sheets, and labor flexibility will drive the U.S. economy.

--A weaker China, a tougher Fed, and a tightening U.S. federal fiscal policy will keep a lid on short-term economic activity, but don't be fooled: The long-term fundamentals are strong.

The famous book and movie The Wizard of Oz bears a lot of similarity to the relationship between the U.S. economy and the U.S. Federal Reserve. In the story, the Wizard hides behind a curtain and manipulates a bunch of levers to produce a lot of scary images and sounds that thoroughly frighten the citizens of Oz. The people are convinced of the Wizard's powers, both good and bad, to change their world.

Although the Fed has certainly tried to be transparent about its maneuvers, it indeed still hides behind a curtain and is still thought to be all-powerful. The Fed's behind-the-scenes maneuvers remain less than well understood by the people, who still shake in fear every time the Federal Reserve chairman pulls a lever.

But most interesting to me is the very end of the story, when the great Wizard is discovered to be a mere mortal. When Dorothy and her crew of travelers further press that their wishes be granted, the Wizard makes a critical and stunning revelation. The Cowardly Lion had already developed the courage that he sought during their long journey to Oz. The Tinman had developed a true heart and no longer needed to be granted a heart by an outsider. Finally, the Scarecrow showed guile and wits during their adventure, proving he really didn't need a new brain; he had already developed one on his own without intervention from a scary, unpredictable outsider.

Similarly, the U.S. economy has improved and strengthened during the current recovery. It doesn't need the continued intervention of an outside, modern-day wizard named Ben Bernanke to save the day. The strength and fundamentals were there all along and just needed a nudge.

U.S. Economic Strengths Are Right in Front of Our Faces
Morningstar's quarter-end sector outlooks, which will be published this week, will paint a picture of some real economic and structural gains. The energy sector outlook is subtitled: "The remarkable surge in U.S. crude oil production is a sight to behold." The 30-year decline in oil production ended five year ago, and progress is still continuing, according to our energy team.

Robert Johnson, CFA, is director of economic analysis with Morningstar.

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