Thursday, April 30, 2015

US economy stalls making rate rise later rather than sooner

It's now six years since the United States began a slow recovery from its worst economic crisis since the Great Depression.

But while the economic comeback has been steady since then, growth appears to have stalled in the first three months of this year.

According to the US Commerce Department, the US economy grew at an annual rate of 0.2 percent which is much lower than expected and the weakest performance in a year.

So rather than steaming back to the days before the Lehman Brothers collapse, the pace of growth appears to hesitant and slow.

Optimistic observers have cited a number of one-off factors that have worked to make the quarter appear more sluggish than it is.

Blizzard like conditions at the start of the year meant consumers were at home not spending; the lower oil price trimmed expansion from big oil companies and a union dispute at ports on the US west coast meant exports slowed because ships were blockaded.

And the outcome appears to contradict other good economic data with the US jobless rate now down the 5.5 percent.

While that looks good on the surface, it adds to the debate about a "jobless recovery" in the US - more part time or casual positions and workers in lower paying roles than before the Wall Street collapse.

"We are creating jobs at a pretty rapid pace - 200,000 per month in most months but these are for the most part not very good jobs," Harvard University economist Benjamin Friedman told the BBC earlier today.

"I think our economy here has a long-term structural problem of not being able to provide good, decent jobs with strong upward trajectory of the kind that middle class Americans have come to know for many generations.

"I think that's going to be a problem and I think it's going to be a problem for more than the remainder of this year."

The outlook for weaker growth now appears likely to make the US Federal Reserve more hesitant about raising interest rates from their near zero level later this year.

The Fed today downgraded its outlook for employment while still sending the message that a possible rate rise was a "meeting by meeting" proposition.

Westpac senior economist Elliot Clarke says the slow growth gives the Fed cause to "wait and see" and to be patient about how future data evolves.

"There was further reason to believe that its quite a weak number and momentum might not build as the Fed is expecting which will be a concern for them," Mr Clarke told The World Today.

"The US economy really depends on what's happening with the consumer. They really need to see the consumer fire to see growth accelerate and to give them justification to act on rates."

The surprisingly sluggish growth in the US sent a warning to global investors and played a role in heavy falls across Europe where markets in Frankfurt and Paris fell around three percent.

Until now, the strength of the US economic recovery has been a bright spot in a world of otherwise anaemic or flat growth.

So today's outcome sends a message that the US remains a wildcard in a world where slow or no growth is regarded as the "new normal".

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