US Economics

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Analyzes major issues in American economic policy and the formulation of policy options regarding national savings, taxation, Social Security, budget policy, monetary and fiscal policy, and exchange rate management.

Our analysis and research are aimed particularly at asset allocators and financial companies as well as any other companies with US interests.



September, 2014.

  • While the recent softening in price pressures suggests that core inflation won’t hit the Fed’s 2% target until a bit later than we previously thought, we still think it will get there by mid-2015. That means a rate hike in March is still possible, especially if the activity data remain strong.


  • Even as the Fed has reduced the pace of its monthly asset purchases, the annual rate of broad money growth has remained largely stable at close to 6%.


  • Looking past volatile growth patterns, the US economic recovery is set to gain speed, growing up to 3 to 4 percent pace this year’s second half.


  • Europe may be stagnating but there are signs of improvements. Housing is slowly recovering. And fiscal drags are easing. Unwinding of earlier fiscal stimulus measures has brought significant headwind for the US.


  • At the same time, tail winds are building, with balance sheets strong, U.S. labour very competitive, the dollar’s value low, encouraging business to shift production to the U.S., shale activity booming, and the Fed accommodative.


  • The U.S. recovery is still fragile. Many who want full-time jobs are still working part-time. Others are still unemployed and looking for work. And many more have ceased looking for work in pursuit of alternative options, at least for a short while, but will be returning in search of a job.


  • Inflation readings are noisy but broad inflation trends remain well below the Federal Reserve 2 percent long-run goal. Low inflation reflects the presence of significant unemployment.



Q2 2014

29th September, 2014.

A Steady Trajectory To Normalcy

The recent strength evident in much of the incoming survey and activity data suggests that GDP growth is likely to accelerate once credit conditions eased and the fiscal drag faded. Should these twin assumptions materialize, we expect the economy to expand at an annualized pace of 3.5% over the next 18months, prompting the Fed to begin raising its policy rate from near-zero next March.


The latest GDP numbers confirm what has been clear from business, consumer, inflation and labour market indicators: the US economy is steadily gaining steam. The changing trends of these indicators has led the government to revise up its estimate for real GDP growth in April-June to 4.3% at an annual rate, from 4% previously. The improvements in the second quarter across all sectors, including consumer spending, residential and non-residential fixed investment, net exports and government spending has given a boost to the economy. The revised up estimate is a confirmation that the recovery is broadly based and that the economy has shrugged off the weather-induced contraction in the first quarter of the year.


Given that the inventory build in the second quarter is estimated to have contributed 1.5 percentage point of the 4.3% growth rate, it will be fair to claim that much of the credit for the second-quarter acceleration was due to an expansion in inventories. However, cyclical rises and falls in inventory are common and, for the most part, this mostly smoothed out the inventory decline in the second quarter. Indeed, should inventory built have been excluded, the US economy would have contracted by just 1.2% in the first quarter and expanded by almost 2.8% in the second quarter. In other words, inventories exaggerated the volatility in the first half of the year but they have not shaped the overall economic growth trend.


We expect economic growth to surpass 3% in the second half of the year, averaging 2.3% for the year as a whole, underpinned by the continuation of three broad trends. First, household deleveraging bottom up: they are beginning to spend more and devoting less income to paying down debt. Second, as unemployment fall consumer spending will be boosted. Finally, although the Fed is winding down its QE 3 programme, interest rates remain near the zero bound, and have slide again recently since the ECB announced a loosening in its monetary policy.


The Bottom Line: First, the US recovery has been slow because its long-term capacity for growth has slowed, and the recovery cannot therefore be sensibly described as feeble. Second, the evidence is against the growth of debt in the US being associated with growth of the economy. And third, growth has not been held back by a wish to deleverage private sector balance sheets.


Risk Assessment

Sovereign risk

The US fiscal deficit is falling rapidly and federal finances look strong enough to absorb higher borrowing costs. The risk of Congress provoking another fiscal crisis has receded: it struck a two-year budget deal in December and raised the government's borrowing authority in February. Even were there to be another debt-ceiling stand-off, The Economist Intelligence Unit believes that the US Treasury would prioritise bond payments.


Currency risk

The current-account deficit, which is a structural drag on the dollar, is forecast to narrow. Trends in yield differentials will be supportive for the dollar against the euro and the yen. The Federal Reserve is winding down its asset-purchase programme, which we expect to conclude in October, followed by an increase in policy rates in the second half of 2015.


Banking sector risk

Capital-adequacy ratios have risen and regulation has increased, which may make banks safer but will tend to constrain profits.


Political risk

Divided government and the ideological gulf between the Republican and Democratic parties will complicate economic policymaking, and some important policy issues will go unaddressed. The debt-ceiling debate will recur periodically, implying that the US will flirt with the possibility of a technical debt default.


Economic structure risk

Increasing energy self-sufficiency, due to rising shale gas and oil production, will reduce import requirements, lowering the current-account deficit. The proliferation of regulations since the financial crisis and inadequate investment in infrastructure pose risks to the US's competitiveness.


Business Environment

According to The Economist Intelligence Unit's business environment rankings, the US will be the seventh most attractive business location in the world in the forecast period (2014-2018), up one place from the historical period (2009-2013). The US continues to hold second place in the G7 group of leading economies, but struggles with strained international relations, an ineffective and bickering Congress and a political system dominated by lobbyists. Policies towards private enterprise and competition are open and transparent. Apart from certain security-sensitive sectors, foreign investment faces few restrictions. The labour market is flexible but more investment in physical infrastructure and education is needed. Some concerns remain over the adequacy of financial regulation. Recent fiscal agreements have reduced the threat of a government default or shutdown in the near term. There has been much discussion about broader tax reform, which would affect all parts of the tax code, but this looks unlikely in the near term.


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