What lies ahead for US economy

15/07/2011

 
What are the growth prospects for the US?

Lately the US market has seemed to be going through what Tim describes as a 'soft patch'. He goes on to say he believes this is due to one-off factors like the Japanese disaster in March 2011. As the effects of such events fade, Tim believes US growth will accelerate, particularly in the second half of this year.

The role of inflation

Low inflation is considered a positive for economic growth because the price of goods doesn’t tend to go up as much as our wages. This means we can afford more, so we’re likely to spend more. This is why the Federal Reserve (the Fed), the US equivalent of the Bank of England, works hard to keep inflation down. Raising interest rates is one way they do this.  

Right now, that doesn’t appear much of an option. The US economy is still recovering from the Credit Crisis so interest rates are at a historic low of 0.1%. If the Fed raises rates too soon, making bank loans and mortgages more expensive, it could stifle the US recovery. But if they go up too late, inflation could become a real problem, making products more expensive and as a result deterring people from spending.

Already inflation is starting to creep up but so far it hasn’t caused too much concern. Tim says: “This is because many believe it’s just a fleeting issue, brought on by higher gas and food prices. But higher inflation may not be as short-lived as some would like.”

Don’t underestimate inflation

There are many factors that contribute to inflation. Some of these that Tim believes may be potential issues include:

• Commodities - the price of products such as oil, wheat and corn is climbing. In addition to this, the US dollar is weak, meaning it may cost the US more to buy things like this from foreign markets. These factors combined are making end products, like bread, pricier. Tim believes the dollar will stay weak for some time, which will continue to make it tough for the US to control inflation.
• China - producing goods in China used to be considered cheap, which made it tough for US manufacturers to compete. So the US increasingly imported goods from the region. But manufacturing in China isn’t as economical as it once was and so the price of goods from the region is starting to go up.
• Residential rent – this accounts for a large amount of how inflation is measured in the US. However, this hasn’t been a significant factor in recent years as more people were buying houses than renting. With low demand, rents were quite stable. Now, after the Credit Crisis, renters outnumber buyers so rents are climbing.

What does this mean for US growth?

Tim sums up: “We still believe growth will accelerate through the remainder of the year and don’t expect a serious inflation rise in the next 18 months. However, there is a chance a number of factors, such as those discussed above, could impact growth over the longer term.”