Emerging Markets / July 29, 2016

Economic Overview of the US (Commentary on the FOMC Meeting)

The United States has experienced a low but steady recovery since the 2008 economic crisis. With the aim of maximizing labor participation, maintaining inflation under control, and keeping the economy moving forward, the Federal Open Market Committee (FOMC) meets on a regular basis to discuss economic and monetary policy. The following overview of the US economy considers macroeconomic indicators and offers a parting point for domestic as well as international investors.

Feds Summer Trends

During the press conference after the FOMC meeting in June and as part of the July meeting statement, Chair Janet Yellen declared that the Federal Funds Rate would be kept between 0.25% to 0.5%. This target funds rate demonstrates that the economy is still operating at a below-optimum level and that the FOMC wants citizens to spend as a mechanism to stimulate the economy. Similarly, Chair Janet Yellen pointed at the decrease in US exports, because of lower foreign demand and a stronger dollar, as a contributing factor to the slow economic growth. Furthermore, the energy industry has been negatively affected in many countries because of the lower oil prices set by large petroleum producers, particularly the OPEC members. Low oil prices have led to decreased investment in mining, hydrocarbons, and drilling. All of these elements led to low private business investment spending during the Spring months.

Nevertheless, job creation has advanced at the moderate rate of about 70.000 jobs new jobs per month during the summer and the average hourly earnings have slightly improved. Furthermore, Chair Yellen stated that the labor market should strengthen further over coming months. A key element of discussion was inflation according to the Consumer Price Index (CPI). This indicator of price stability has been measured at roughly 1.0% over the last year, with core inflation being at 1.5%. This inflation rate falls somewhat short of the Fed’s target of 2.0%. The lower inflation is mainly due to the energy sector of the CPI, which has experienced lower costs for many consecutive months. However, a proper analysis cannot be completed without assessing all sectors of the CPI. This includes the food and beverage sector, which has been growing fast over the last several years. This accelerate growth is leading to hardships in the restaurant industry and underlines the need to invest in order control future food prices.

US Economic Outlook

The FOMC expects median real GDP to grow at a rate of 2.0% through 2018, and expects an average unemployment rate of 4.6% through next year. As for the overall inflation, it is expected that it will close at a rate of 1.4% for 2016, raising to 1.9% for 2017, and eventually hitting the 2.0% target in 2018. However, a further strengthening of the US dollar could lead to lower inflation. Similarly, the federal funds rate is expected to rise and stabilize reaching 1.5% towards the end of 2017, and 2.5% during 2018. In the meantime, Chair Yellen stated that the FOMC wants to avoid going down to zero with the fed funds rate in order to have policy tools in the event of an economic shock. As an overall trend, the last few months have shown higher household spending, in spite of the low levels of business investment.

The US economic condition is an important element to keep in mind when considering both domestic and foreign investments. The macroeconomic overview presented above serves as a good tool and starting point for those interested in investing.

Latest Media