Strengthening US and global economic conditions indicate an optimistic outlook for 2006, according to Vanguard economist Joseph Davis Ph.D.

Mr. Davis supports Vanguard's Investment Counselling and Research and Fixed Income Groups and he presented his bullish assessment recently at the first annual Vanguard symposium at the Royal Bermuda Yacht Club in Hamilton.

"The bottom line is that the consensus is very sanguine in terms of the outlook for the economy globally, not just the US. The key question is: Are expectations are too optimistic?" Mr. Davis said.

From a statistical and economic standpoint, he said the US economy is doing well. He said by examining a basket of statistics its possible to see how the economy is performing on a monthly basis.

"The economy is growing above trend, loosely speaking at around 3.4 real GDP growth and estimates that not only I, but many members of the Federal Reserve Board and other intelligent practitioners and academics support.

"Certainly there has been volatility during the fourth quarter of last year where real GDP growth was below two percent.

"Since then we have had a sharp rebound which will be reflected in data not released yet but will be for the first quarter of 2006 and it is very likely we will see GDP growth at close to five percent."

Mr. Davis said data is showing the US labour market is firming and payrolls increasing and businesses have generally stopped firing although they have been more reluctant to hire. Higher productivity is an encouraging sign for long term expectations for the economy.

He said there are strengthening global economic conditions: "The global economy is in very good shape and growth is not only above trend, it's accelerating."

Mr. Davis cited leading global economic indicators and information on world real GDP growth and world CPI inflation rate compiled by Consensus Economics, the International Monetary Fund and Vanguard.

He also said global equity markets have performed well over the past year. In addition, many industrial countries have strong balance sheets while said emerging market fundamentals have never been stronger. Mr. Davis does not anticipate this will change any time soon.

Mr. Davis conceded that there is sizeable camp who do not subscribe to this optimism.

"Some of our competitors in the fixed income world and the equity world are more bearish on the economy and are adjusting their portfolios accordingly," he said.

He said they contend the world economy is in more dire straits than the consensus believes and there is evidence pointing to a recession such as the US yield curve, which has flattened in recent months, meaning there is no difference between interest rates for short and long term bonds.

"If we are at a recession or close to it, the Federal Reserve will not only stop raising (interest) rates but they will be in a significant easing monetary stance," he said.

But Mr. Davis does not believe the US is heading for a significant slowdown because there is a stable inflation environment and inflation expectations are well anchored.