US economy on the rise

US economy on the rise
The US economy expanded at an annual pace of 3% during the three months to the end of September. The growth rate is higher than what had been forecast by experts.

The US economy expanded at an annual pace of 3% during the three months to the end of September. The growth rate is higher than what had been forecast by experts.

Background

The United States is the largest economy in the world in terms of nominal GDP. The U.S. GDP was estimated to be $18.46 trillion in 2016. The U.S. dollar is the currency most used in international transactions and is the world's foremost reserve currency.

The International Monetary Fund stated in July that the US economic growth will be 2.1%. It downgraded the nation’s growth rate from 2.5%. However, the US administration headed by President Donald Trump has maintained that the growth rate would be 3% in 2018. US hopes to give a boost to its economy through expected tax cuts and federal spending.  The IMF had ruled that US’ projection was unlikely as the labor market is already at a level consistent with full employment. It also critiqued the US administration’s ever evolving policy plans as a source for uncertainty.

The US stock market has enjoyed a bull market since 2009. For the first time since 2007, the market closed above 14,000 in February 2013. The market has been rising since the US presidential elections. In August 2017, For the first time in its 121-year history, Dow Jones Industrial Average broke the 22,000 barrier. 

 

Analysis

The US economy expanded at an annual pace of 3% during the three months to the end of September. This growth rate was higher than was expected by experts. This is largely due to the fact US states and towns have been hit adversely by hurricanes in the past few months. In the previous quarter the US GDP grew at an annual pace of 3.1%. On a year-on-year basis, GDP was up 2.3% according to estimates.

The economy has grown for eight straight years, one of the longest stretches in history. Unemployment is down to 4.2%, its lowest since 2001. The United States has added jobs in 83 of the past 84 months.

"Overall, this is a very solid performance, given the disruption caused by Hurricanes Harvey and Irma," wrote Ian Shepherdson of Pantheon Macroeconomics.

The growth has been attributed in part to consumer spending that has held steady across the nation despite the hurricanes. The Republican majority government is currently working on a tax plan. Republicans said that the growth rate was a sign that businesses were already spending more in anticipation of a corporate tax cut.

Commerce Department Secretary Wilbur Ross said, “President Trump's bold agenda is steadily overcoming the dismal economy inherited from the previous administration. As the President's tax cut plan is implemented, our entire economy will continue to come roaring back.”

The economy is experiencing its fastest growth spurt in two consecutive quarters since 2014. "It's still the slowest recovery by a long way," says Dan North, chief economist at Euler Hermes North America, an insurance firm. "But we don't see anything to suggest that we would get a recession in the next year. Their net effect seems to have been smaller and shorter than we expected."

Kenneth Rogoff, a professor of economics at Harvard University, said that improvements in the labor market can also be attributed to the policies set in motion by previous President Barack Obama. He said, “"Let's make no mistake - this was a very good number. Jobs have been improving, consumption's been improving, businesses are doing better, there is a profound inequality problem but the US economy, despite not much from President Trump, has been doing well.”

Despite the fact the economy has continued to grow, there is a growing concern of national debt which has also risen. According to a new analysis by Bipartisan Policy Center the deficit could reach $1 trillion as early as 2019. This is a good four years before what had been forecast by the CBO in January.

"These projections foreshadow another period of trillion-dollar deficits at a time when the United States has experienced one of the longest continuous economic expansions in history and an unemployment rate of 4.5 percent," the center's analysis concludes.

Trump administration has stated time and again that the goal will be a growth of 3%. Economists say it is highly unlikely as the first quarter was tepid, and projections for the current quarter hover around 2.8 percent.

Assessment

Our assessment is that the robust economic growth rate is likely to boost President Trump’s upcoming tax plan which seeks to make cut down taxes for the top 1%. We suspect that the stock market and businesses might already have factored the substantial tax cut. A failure to deliver could lead to a pullback in performance. A corporate tax cut will allow companies to greater access to their offshore cash, in turn allowing them to invest more in the US and be able to return more cash to their share holders. We believe that the long term economic policy position of the US will be determined by Trumps choice of the next Fed chair. The option is between the current chair, Janet Yellen, an advocate of low rates which will help growth and jobs and Stanford economist , John Taylor who favours rising interest rates.

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