Monday, 17 October 2016

As election approaches, U.S. economy chugs along

In World Economy News 17/10/2016

To paraphrase new Nobel laureate Bob Dylan, the economy is like a slow train coming.
Less than a month before the presidential election, the U.S. remains on track to grow around 2% this year. There’s little likelihood of any rail switch in the economy’s performance that will affect the vote any more than it’s already done.
A batch of mostly secondary reports this week on housing and manufacturing won’t show much deviation. The real estate market is chugging along as rising employment enables more Americans to buy homes. Manufacturers are still ploughing ahead, though barely so.
What’ll take center stage is the latest snapshot on consumer prices. Inflation has been creeping up because of rising housing and medical costs, but it’s still quite low even though a surge in employment is also nudging wages higher.
As long as inflation remains low, the Federal Reserve is unlikely to adopt a bullet-train approach to raising interest rates. The economy is stable and growing, but it’s fragile enough that it could get knocked off the rails easily by bad decisions in Washington or more stutters in the global economy.
“Policy mistakes or global shocks could tip us over at any time,” said Steve Blitz, chief economist at M Science, an investment research firm in New York. A Chinese economic route, messy Brexit exit or hasty series of Fed rate hikes are some of the potential risks. “It’s a global economy — everything is interconnected.”
Still, Blitz and most other economists see little risk in the short run. The biggest reason: consumers are in the best financial shape since the Great Recession.
Americans have whittled down debt, increased savings and benefited from years of strong hiring. Their paychecks are even rising a bit faster, while low gas prices and the falling cost of food allow them to stretch their dollars further.
“From a consumer’s perspective, we are paying less to buy the stuff we need,” said Ryan Sweet, senior director of real-time economics at Moody’s Analytics.
The frugality of consumers also helps explain why inflation is low for many goods and services. Americans are so price sensitive they’ll shop elsewhere if businesses try to sharply raise prices.
Still, a variety of measures for wages and compensation show upward pressure on what companies have to pay to keep or attract workers as the pool of people available for hire shrinks. The U.S. unemployment rate, now at 5%, points to the tightest labor market in years.
Yet while an increase in interest rates is probably coming up around the bend in December, the Fed is in no hurry. Barely 2% U.S. growth and even lower inflation is no sign of a runway economy.
“The Fed is going to be very slow in normalizing rates until they see more evidence that inflation is rising,” Sweet said.

Source: MarketWatch