In World Economy News 25/05/2015
The engines of the U.S. economy are sure to fire back up. What’s still a mystery is just how much.
Not long ago, economists thought U.S. growth could reach nearly 4% in the second quarter after a tepid 0.2% gain in the first three months of the year, a period marked by unusually harsh weather. That would be a carbon copy of the feast-or-famine growth pattern that occurred in 2014.
Now many are not so sure after an uneven batch of economic reports midway through the second quarter. A poll of analysts compiled by MarketWatch predicts the U.S. will expand at a 3.2% annual rate from April through June — and some have chopped their forecasts to below 3%.
A cluster of fresh reports this week probably won’t give much inkling.
Orders for durable goods such as TVs and trucks that are meant to last a long time are expected to fall again in April. Business spending and investment have softened considerably since last fall.
Sales of new homes nationwide, meanwhile, might creep higher in April, but closings are still historically weak. And a pair of surveys on how consumers fell about the economy probably won’t show much change. Americans are happier, but they are far from satisfied.
Dollar daze
The biggest blow to the U.S. economy appears to have been struck by a soaring U.S. dollar. The greenback’s value has jumped 18% since last summer and it briefly touched an 11-year high, according to the WSJ Dollar index. The index compares the dollar to other major currencies.
A stronger dollar makes imports such as Roquefort cheese from France, Volkswagen Passats from Germany or HDTVs from Japan cheaper for Americans to buy. The downside is that it hurts many export-heavy American companies such as Caterpillar and Microsoft,and if the wound is deep enough, hiring in the U.S. also suffers. And that’s exactly what’s happened.
“The strong dollar is undoubtedly hurting our exports,” said Stephen Stanley, chief economist at Amherst Pierpont Securities.
As recently four or five months ago, many economists on Wall Street or at the Federal Reserve didn’t think a strong dollar would hurt the U.S. as much as it has. After all, the U.S. is now a service-based economy in which the bulk of buying and selling takes place within the nation’s borders.
Yet the impact of foreign trade on the nation’s economy has been growing steadily for years, making the U.S. more sensitive to sudden shifts in the dollar. The value of exports and imports equaled a record 28.7% of gross domestic product in 2014, twice as much compared to 25 years ago.
Fed on alert now
After barely mentioning the dollar last year, the Federal Reserve has also become very sensitive to its influence on the economy — a factor that could prompt the central bank to put off an increase in interest rates anytime soon.
“The value of the dollar had increased significantly since the middle of last year, and it was seen as likely to continue to be a factor restraining U.S. net exports and economic growth for a time,” note the minutes of the Fed’s last big meeting in late April. The minutes came out late last week.
Steve Blitz, chief economist of ITG Investment Research, said an interest-rate hike could boost an already turbo-charged dollar and hurt U.S. exports even more.
“The Fed is now more worried about the strong dollar,” he said. “They can’t raise rates because of that.”
If there’s a silver lining, most of the damage already appears to have been done. The value of the dollar has leveled off, and it remains that way, the U.S. trade picture is also likely to stabilize. That would ease the pressure on American businesses and let them go about hiring and investing without worrying so much about currency shifts.
Consumers still key
The improvement in the labor market is ultimately what offers hope that U.S. will rebound like it did in 2014, when the economy bounced back with an average 4.8% growth rate in the middle of the year after contracting sharply in the first three months.
Although hiring has tapered off since last fall, the economy is still adding nearly 200,000 jobs a month, the unemployment rate continues to creep lower and layoffs are at a record low. Just as important, a long freeze in wage growth finally appears to be thawing, though at a glacial pace.
All of that is enough to drive a steady increase in consumer spending, the pillar on which the U.S. economy stands. Just don’t expect the economy to suddenly revert to the juggernaut it once was.
“I think we’ll see a bounce back in the second quarter, but I don’t think you are going to get a boom in consumer spending going forward,” said Stanley, who forecasts 3.7% growth. “Consumer spending is going to live or die with income growth.”
