The US economy has presented a lot of surprises in the recent times. On one hand, we read a lot of positive news about the US economy while on the other hand, there are negative news about its health. It is interesting to note that the economics is no more giving absolute answers or indications to the questions posed by the analysts as it is increasingly difficult to hold the proverbial “Other things remaining the same” when we do economic modelling. We live in a complex world after all and therefore there is a lot going on in any economy at the domestic and global level in this increasingly intricate interlinked world.
US inflation growth rate declines
According to the data released by the US bureau of Labor Statistics, the US inflation recorded its smallest growth rate in the month of June on year-on-year basis rise since March 2021. The US consumer price index (CPI) increased by 3 per cent on the year in June, which was lower than 4 percent recorded in the previous month. The personal consumption expenditure price index made a meagre growth of 0.2 percent Core CPI excluding food and energy, increased by 4 per cent in June which was also its lowest rate since October 2021. However, it is still much above the federal bank threshold of 2 per cent or less in a year. Rents were the biggest contributor to inflation, but it is expected that rents may also follow the suit and register a decline in the coming months.
Source: World economic Forum
The slowdown in the inflation is good news for the US economy which is currently going through one of the longest monetary tightening regimes. The energy cost was down by 16.7 as compared to 11.7 per cent in May, as the prices decreased by 36.6 per cent for fuel oil, 26.5 per cent for gasoline, and 18.6 per cent for utility gas service even as electricity prices increased by 5.4 per cent compared to the previous month.
Further, inflation slowed for food and was estimated to be 5.7 per cent as against 6.7 per cent in May and shelter was also decreased by 7.8% slightly lower than 8% in the month of May. The prices increased at a lower rate also for new vehicles by 4.1% in June (4.7% in May), apparel by 3.1% (3.5% in May ), and transportation services (8.2% vs 10.2%). The cost of medical services was down 0.8% and prices of used cars and trucks declined 5.2%. However, the slowdown is partly attributed to the high base effect from last year when the headline inflation rate reached around the 1981 high level of 9.1%.
Fed hikes interest rate to 22 years high level
The Federal Reserve of the US has recently continued to proceed with its interest rates hikes which were increased from the prevailing target range of 5.00-5.25% by 25 basis points to 5.25-5.50 per cent. This was quite in line with the market expectations but the fact that the Fed officials had given an indication that they were close to concluding their rate hikes cycle even before the release of June’s CPI data, it only gave positive vibe to the markets that the Fed may indeed do so in the next policy declaration in the light of the decline in inflation rates. This was well manifested by the record heights achieved in the year so far in several global stocks.
If we read the fine print of the US policy document, it is very clearly indicated that the Policymakers may continue to monitor the implications of incoming information for the economic outlook and would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of inflation and employment goals. The range of information considered by the US monetary policy makers do not only consider the strength of the inflationary pressures but also ponder over a wide range of information, including how the labor market behaves, what are the inflation expectations, and the financial and international developments. The Fed in fact has resumed its tightening campaign after a brief pause in June, on noticing that the economy has been expanding at a moderate pace, job gains have been robust in recent months, and the unemployment rate has remained low while inflation remains elevated.
Increase Growth in the GDP in Q2 indicates US is reeling out of recession
US economy has manifested signs of resilience as its GDP rose at 2.4 per cent y-o-y basis in the second quarter as per the initial estimates released by US Commerce Department. It seems to have increased quite unexpectedly because it was stuck at around 2 percent growth rate in the last quarter. The GDP growth rate accelerated on the strength of increasing consumer spending at the rate of 1.6%. It appears that the US economy is improving much faster than what most economists had estimated, allaying the apprehensions of recessions until a few months back. The growth rate has increased in housing and utilities, healthcare and financial services, which gives hope that the US economy is back on the growth track.
Job Growth
The US labor market is showing signs of cooling down as there were only 187,000 jobs reported to have been added in the month of July, which stood lower than what was expected. According to the US Bureau of Labor Statistics, the job market continued to add at least 200,000 jobs on an average each month in the current year. However, if we compare the June and July new jobs data to the 472,000 jobs created in January 2023, the numbers present a dismal picture. One of the major reason could be the continued series of policy rate tightening by the Fed. But looking at from the other point of view of the Fed may actually consider a pause or even reversal in its rate hike policy stance in its next policy considering the slowed down pace of of Job creation in the US economy.
Rating Downgrade
Clearly the health of the economy is determined not only by the economic forces, but several other factors that shape the environment in which the economy performs. Recently, Fitch downgraded US sovereign rating from AAA to AA+ on account of a steady decline in governance over the last 20 years. Even as the US Treasury Secretary called the downgrade as “arbitrary”, based on “outdated data” from the period 2018-20, the rating downgrade may influence investors who usually do give importance to the rating assigned by independent rating agencies in estimating the risk involved in lending to the government of any country. It is important to note that in the month of June only, the US Government had raised the debt ceiling to $31.4 trillion and succeeded in avoiding the possibility of the country defaulting on its debts for now.
To conclude, the rating downgrade appears to be little inconsonant with the other economic data released in the US. And therefore, it may not have a lasting disrupting impact on the US economy, which seems to have gained some momentum in the recent times. The fundamentals of the US economy appear to be strong and it is a good indication for the rest of the globe as well
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