Growth And Predictions For The US Economy In The Third Quarter

Tweed-Economics-US-Economy (1)
Tweed-Economics-US-Economy (1)

Overview of the US economy

The United States of America runs a multi-faceted, free market economy. With a GDP of $21 trillion, the US has the largest national economy in the world. The largest component of the US GDP comes from consumer spending, government expenditure, investments and net exports. According to an article published on the Balance (1), consumer spending accounts for close to 70% of the GDP, while government spending contributes about 17% of the total. Business investment is an important promoter of the GDP since it covers key drivers of the economy, such as intellectual property, manufacturing and real estate construction. The US budget is largely funded by income taxes obtained from tax payers.

What are the economic growth projections for 2019?

The US economy has been on a steady recovery following the devastating effects of the 2008 financial crisis. The renewed hope is evident in the strong unemployment numbers, durable goods orders and stable GDP growth. The economy is also showing a lot of resilience when you look at the inflation and deflation statistics. However, the rate of economic growth is expected to slow down from 2019, albeit gradually.

Most economists expect this trend to prevail in the foreseeable future owing the existing economic climate. According to Balance (2), the GDP growth rate for 2019 is projected to grow at between 2% to 3%. In the next two years, the US economy is expected to grow at 2% in 2020 and 1.8% in 2021. Economists expect the unemployment rate to remain stable since the market isn’t moving towards inflation or deflation. The number is likely to rise slightly in the coming years to stand at 3.7% in 2020 and 3.8% a year after.

In spite of the impressive figures, there is concern that a significant number of workers are only engaged on a part-time basis and most would desire high-paying, permanent placements. The report shows the inflation rate will remain low in 2019 to stand at 1.5% and rise steadily thereafter to 2% in 2021. The Fed may also lower the interest rate on the back of stable, core inflation rate, whose index doesn’t feature the highly volatile gas and food prices. Lastly, the manufacturing sector is expected to grow faster than the overall economy.

Growth and economic policy predictions: An expert view

A lot of the things expected to shape the economy from Q2 all through to Q4 and beyond will hinge on policy implementation and positive sentiments from leaders. A Washington Post report by a former Chief Economist, Jared Bernstein sees the federal deficit rising and the economic growth slowing in 2019. The likelihood of Federal deficit rising is as a result of President Trump’s tax cut and the consistently rising government spending.

According to the author, the economic growth will be weighed down by the fading stimulus package. It important to note that the deficit-funded tax cuts and spending contributed a whole percentage point to GDP growth in 2018. The economist also predicts zero increase in the interest rate; rise in wages and inflation and escalation of the trade war. Fears about China’s slowing economy and a simmering trade war with the US remain a big concern to the economy.

The politics of the economy

America has been at loggerheads with China and other trading partners. The trade war could escalate since it is part of Trump’s campaign pledge and bedrock of his “America First” economic policy. When he assumed office in 2017, President Donald Trump promised to grow the economy by a staggering 4%. If these growths were to be realized, economists fear this would fuel “overconfidence irrational exuberance”, which could be detrimental to the economy.

The growth could seriously interfere with the fundamentals of the business cycle, such as capital availability, supply, market perception and demand. However, the President’s policy statements are not expected to hugely impact the unemployment numbers, which is expected to stand at 3.6% in 2019. Looking at the overall performance of the economy, a deduction can be made that changes are less stark compared to the day to day intricacies of the stock market.

In his assessment of the economy, Alenjandro Chafuen, a policy contributor at Forbes magazine also sees a slowing economy; one that will eke 2% growth in 2019. The forecast stems from the current push for lower taxes and stricter regulations from the new, Democrat dominated Congress. The push is expected to face headwinds from the Republican led Senate and the government bureaucracy. More internal pressure will come from increased protectionist policies and rising government deficit.

What the Numbers Are Saying About the US Economy

Tweed-Economics-US-Economy
Tweed-Economics-US-Economy

President Donald Trump inherited an economy with an admirable trajectory, thanks to solid job growth, low unemployment and sound economic fundamentals. However, in the last one year job gains and wage growth have been less steady. This has fueled talk on whether the US economy is bouncing back or losing steam two years after Donald Trump took over the reins of leadership from President Barack Obama. According to NBCNews.com, the US economy created 196,000 jobs in March 2019, beating the 175,000 forecast that analysts had projected.

Figures

This figure was a big leap from the dismal 33,000 jobs created in February. The worrying job statistics sent jitters across Wall Street, but the White House dismissed it as an outlier instigated by the 5-week long government shut down and a string of bad weather. The drop raised fears that the Federal Reserve could step in to rein in the interest rate as it did in 2018 when it announced an unprecedented four rate adjustments. President Trump was among those who decried the adjustments. The 3.8% unemployment rate recorded in March was the lowest in 50 years.

Wages

According to the Bureau of Labor Statistics (BLS), the wages took cue with a 1.14% rise, which was an impressive 3.2% year on year growth. It will be remembered that the US economy created 225,000 jobs monthly in 2018. Economists expect the economy to ease somewhat this year as the President’s $1.5 trillion fiscal stimulus package doubles down. The tweaking of the economy follows the tepid growth being witnessed around the world. Fears have also been raised regarding continued trade spat between two global economic powerhouses, the US and China.

Leadership

In spite of the uncertainty, there is a reason to believe Trump has a lot to with the economic vibes reverberating across the country. According to a USA Today report published on October 2018, economic growth under Trump averaged 2.9% at the time. The Trump’s economy has also added 3.6 million jobs and pushed the unemployment rate down to 3.9% from 4.8% when he took over as president. It should be noted that people of color, including Latinos and African Americans are witnessing some of the lowest unemployment rates in decades.

Small Business Owners

Lots of optimism is also coming from small business owners. Another key indicator of fair economy is the 3% growth in real disposable income that is up from a flat rate under Obama’s presidency. In spite of the prevailing positive outlook, some analysts say it is too soon to make conclusive proclamations regarding Trump’s initiatives in the wake of hot button issues like taxes and regulatory cuts. There is also nervousness as to whether the growth will be sustained over the coming years. Optimists are pointing to growth in government spending as a sign of a strong future.

Government Spending

The government spending rose to 7% over the 2017 figures, which shows the GDP is growing and might maintain the momentum. On the downside, the deficit is expected to hit $1 trillion and the national debt, a staggering $30 trillion by 2025. Matters might come to head if the debt begins to pull down the economy. The other fears come from Trump’s tough immigration stance and trade policies. As workers, employers and poly makers ponder over the future, there are a few fundamental questions that need to be asked to gauge the health of the economy.

Tax Reforms

According to Forbes magazine, stakeholders need to question how much growth the tax reforms will generate and what Trump’s trade agreements like NAFTA portend for the economy. The answers to these questions will go a long way to impact economic growth and the direction of the stock market indices. The magazine lists the key indicators for assessing the US economy as:

• DOW 30 and S&P 500 Index

• GDP growth figures

• Monthly and annual jobs growth

• Manufacturing jobs growth and future outlook

• Unemployment rate

• Growth in hourly wages

• Federal deficit

• Trade deficit

Reading Economic Indicators

The performance of key economic indicators can make or break investor confidence and investment prospects. Rusty Tweed has spoken and written many articles about market indicators. The highly regarded economist recently commented about the housing market, specifically how the rising market can affect the sector the stock market.

His assertions centered on financial institutions lending and interest rates; the imbalance in the housing supply and demand and the impact of higher down payment and its repercussions on real estate investors. Tweed sees an eerie correlation between investment in the housing sector and stock market. For instance, investors are often drawn to a rising market, but fall back on their positions when things begin to look down.

The US Economy is Fine Now, But Watch Out for 2020

Rusty Tweed

Rusty Tweed

According to Paul Ashworth, who serves in the Capital Economics as the chief U.S economist and also the winner of March Forecaster of the Month award, he mentioned that the current status of the U.S economy is doing well, but as the next few years comes by, the stimulus is going to start fading away.

Mr. Ashworth added that his team was optimistic about America’s stability, and they assumed for such a long time that Washington’s United Republican government would bring about a good amount of stimulus, which happened and they were right. The move to cut taxes and end the spending restraint has given the economy of the U.S a great boost to survive the next two years.

What is in store for the U.S economy 2019 and 2020

After the next two years, what is going to happen? Ashworth stated,” There is a growing concern that the fiscal stimulus is fading, and this is bringing about a major concern.” For 2019 and 2020, Ashworth is expecting these years to be weaker because the Federal Reserve is expected to cut the country’s interest rates in 2020.

According to Ashworth and his team, they see that the economic projections of the Federal Reserve are optimistic at growing way above the trend up to the year 2020. This projection seems to be too far-fetched if you ask Micheal Pearce who is a senior U.S economist. He continued to share his sentiments on how the fiscal stimulus will send a boost to spending and incomes for one final time, unless the economy finds a new source of supply capacity to grow the economy; otherwise, growth will start to drop.

What is expected to happen after 2020

According to economists, they expect a modest downturn in the economy which should be reversed quickly after 2020, because the expansion will take some time to end. But by the time the downturn will be ending, the U.S economy will have undergone the longest expansion in its history.

Ashworth advises that people should think about what is going to happen in the next downturn. Although they expect it to stay for a relatively short time, it won’t be as damaging as the great recession that occurred in the year 2008-2009.

Some of the reasons that might cause the economic downturn

There is a premise that Ashworth does not accept. The premise involves how the Republican fiscal plan revolves around the supply-side economics that assumes businesses have for the longest time been holding back on investing in new supply because of high taxes and regulations.

Ashworth’s argument is related to how countries that had low corporate tax never see an economic boom in their investment afterward. He added that the U.S is known to raise its capital spending because supply is starting to hinder growth, and not because companies have been set free.

There is also the issue of the trade war that is going on between the U.S and China. This kind of talk is great for politics but is bad for economics. But will be seen in the next few months is the U.S government accepting some small concessions and reign supreme on the trade wars; the same way South Korea’s case was handled and is also expected to happen with NAFTA negotiations.

The Future of the U.S Economy for the years to come

Since the Trump Administration took power, he created a positive economic sentiment that was also taken by the Republican majorities. Trump’s administration pledged that they would pursue the reform, tax cuts and policy trifecta of deregulation.

What is known is that sentiment usually goes both ways. Just like the pro-business way that Trump is using can boost the confidence of the economy, the perception of leader who is not-for-business can bring down the confidence. Since sentiments influence the behavior of people, their impact is far-reaching. But the sentiment is not a great way to measure the actual economic prospects and development.

So far, when you look at the market’s reaction to Trump’s victory, there has seen a rise in stocks to multiple highs, but that has not been the case on “hard data.” Economic forecasters have only made some modest increase in their projections.

If the confidence in the US economy does not trickle down to hard data, expectations that are not met on corporate earnings and economic growth could cause the sentiment of the financial market to slow down, which will fuel market volatility and shoot down asset prices. This scenario will sputter the US engine to cause the global economy to slow down, especially if these scenarios cause the Trump administration to come up with protectionist measures.

Looming “Debt Hangover” Will Crush The Economy

Rusty Tweed

Rusty Tweed

A time will come when the U.S will inevitably have a debt hangover, it may not be the coming week or next month, but it will soon come. The continued effects of continued lowering of the tax-revenue, government spending, always-increasing interest payments, and increasing compulsory welfare payments will soon be felt, and that is a feeling that will not be a pleasant one.

How we got here

The current national U.S debt that is publicly held is 75% of the GDP. Although that number can be shocking to the average citizen, to economists, they see this number as a good figure. Before the recession of 2008, the national public debt in the U.S was at 35% of the GDP. Over the last decade, the debt has grown by 40%. Why is that the case?

The answer lies in government spending. The U.S government decided that the only way to get out of the recession was to spend. This was championed by the Federal Reserve and a handful of economists who encouraged monetary and fiscal authorities to continue deficit spending and issue more debt to institutions and individuals or borrow in order to spend. That decision worked, but some people argue that there was not enough money that has been spent.

The impact of debt hangover in the U.S economy

Currently, the U.S is undergoing low unemployment rates and a long period of growth that has never been seen in the history of the country. According to the Congressional Budget Office, it was highlighted that by the year 2047, while maintaining the same trend of fiscal policy, the U.S debt ratio will linger around 150% of the GDP. Imagine what is happening between Italy and Greece happening in the U.S; that is how bad the situation can get for the U.S.

The World Bank has put up estimates that every percentage point that goes above the debt to GDP ratio of 77% would lead to a decline in the annual growth by 17 basis points. This can translate to a loss of 12% of the growth of GDP in the next 30 years. Looking at it in another perspective, it would mean that the U.S economy will have stopped growing for over four years.

If you think that is the only consequence of the existing fiscal policy, you are wrong. The flexibility that Congress has on implementing expansionary fiscal policy in economic downturns will be less. Investors will be in need of higher rates of interest to be able to invest in an economy that is increasingly becoming volatile.

When the cycle of net interest payment increases and higher interest rates are resent, the result will be a net interest payment that will eclipse other major spending programs by 2047. If we decide to look at Medicare and Social Security, it will require large investments to keep the short-term solvency.

What the economists say

There are economists who argue that if the economy could be spurred faster than the compounding interest payments, and it ignores entitlement programs, then things would be okay. But spending is not the issue; the problem rests on the revenue and the GOP tax plans which do not help.

The GOP tax plan economics is not hard. When you talk to the Keynesian economists, they would argue that the tax cuts spur economic growth and stimulate the economy. But most of the economists are not supporting the tax plan and the basis behind it, especially when you look at the current economic status. Cutting taxes is not something that is needed at this time.

Most economists believe that the lack of tax revenue will increase the chances of a financial crisis. Estimates by the Dynamic CBO propose that the growth of the GDP due to tax cuts will be dismal and will be below the required levels that are to mitigate the impact of an increased portion of the U.S national debt to GDP.

At the moment, the U.S government is not armed with the right tools to deal with the debt hangover that is looming. Within the next decade, the economy will still maintain the healthy standards. The U.S will not be bothered by the impacts of the existing fiscal policy until the time when it is too late.

The GOP tax plan consequences should not be understated, and it was not only the tax plan that placed the U.S in this state. There needs to be an implementation of reforms that will alleviate the impending consequences of the existing fiscal policy. But sadly, the changes in policy that are needed do not appeal politically.

Revenue needs to be raised by the Congress, and spending should be cut without impacting Medicare and Social Security. There are a number of options that the CBO provides, and they are 115 in total. These options are meant to control discretionary and mandatory spending and stimulate revenue.

Current Market Indications Point to Potentially Robust Economic Growth in 2018

It has been nearly a decade since the end of the Great Recession. After such a lengthy period of recovery, there are now signs that the US economy is finally poised to experience robust growth throughout 2018. Perhaps most importantly, current market trends have economists especially optimistic about the possibility of pervasive growth, with many analysts expecting a significant acceleration in wage gains.

During the long period of economic recovery that began in 2009, the US economy posted an average growth of 2.1 percent, with 2.9 percent (2015) representing the high-water mark. Due to the expectation of continued business investment and rising consumer spending, analysts are projecting a 2.6 percent rate of growth for 2018, an increase of 0.3 percent from the 2017 projection (2.3 percent). Since the 2018 projection was made prior to the passage of tax legislation, it’s reasonable to conclude that the 2.6 percent figure might approach a full 3 percent.

Of course, these projections never rely on any single market indicator, and a number of recent developments have contributed to the optimistic economic projections for the year ahead. Consumer demand for automobiles, combined with continued technological innovation as well as the recent rally in oil production, has been instrumental in the recovery experienced in the manufacturing sector. With the global economy also growing stronger, other sectors in the US have enjoyed significant benefits as well.

These recent domestic and international gains continue to play an important role in the declining unemployment rate in the United States. At 4.1 percent, the nation’s unemployment rate is the lowest posted in the aftermath of the Great Recession, when the unemployment rate reached 10 percent in 2009 (prior to 2009, it hadn’t eclipsed 10 percent since 1983).

Even at the current rate of 4.1 percent, analysts tend to agree that the downward trend will continue in 2018. This is good news for American workers, as employers will be forced to compete for new hires and will likely adopt stronger policies intended to retain current employees. Employers will also have to seriously consider instituting robust training programs to help fill existing vacancies, which will give American workers the opportunity to expand their skill set without investing in potentially costly academic programs or vocational schools.

It’s these conditions — an ever-tightening labor market at a time when companies have immediate and expanding employment needs — that have economists confident that wage growth with finally experience significant gains after stagnating for nearly a decade. According to current projections, analysts are predicting an increase of 2.5 percent for 2018, with gains growing stronger with each passing month until finally exceeding 3 percent at year’s close.

When wage growth rises at a rate approaching 3 percent, it’s only natural to expect a commensurate increase in consumer spending, which is responsible for approximately 70 percent of the US economy. Consumer spending is expected to increase at a rate of 2.5 percent, and business investment is projected to grow at a rate of anywhere from 4.5 percent to 6 percent or more.

The recent tax legislation is expected to further bolster these projections, although it remains possible that the overwhelming majority of corporations will opt to use the tax cuts to increase dividends or buy back stock rather than investing in employees by increasing wages or expanding benefits.

Although the full economic impact of the recently passed tax cut legislation remains to be seen, economists recognize ample reason for optimism about the possibility of economic growth in the year 2018. The most recent projections for economic growth are supported by a number of critical market indicators, including declining unemployment rates, increasing wage gains, and the likelihood of increased business investment, all of which contribute to the growing confidence in the future of the US economy.