Intro
This paper looks at the prospects of the US economy and will explore whether the phrase; “the prospects of the US economy are good” is in any way true. This paper will use data collected and published by this report will use data collected and published by global institutions to look into key aspects of the US economy. “An economy encompasses all activity related to production, consumption, and trade of goods and services in an area.” (Kenton, 2018). There are four main types of economies; Traditional, Command, Market, and Mixed economies, all having their unique characteristics. The US economy is a mixed economy because the government is involved in the regulation and guidance of the US economy but has more of a laissez-faire attitude compared to many other countries especially when there is a republican president in office. The US economy’s future is frequently in the headlines due to their unpredictable serving President promising economic improvements, especially about unemployment and growth. This paper looks at the predictions for GDP, unemployment, interest rates, and inflation. During 2018 the US economy experienced a very good year with growth on pace to exceed 3%, the unemployment rate at a 48-year low of 3.8%, and inflation in line with targets. So, the US economy will be entering 2019 with a strong economic foundation that they will be able to work from. This paper ends with a recommendation as to whether the timing is right for an organization to consider international expansion for its products in the US market.
The prospects of the US economy remain encouraging in the short term which is supported by the key indicators shown below;
Save your time!
We can take care of your essay
- Proper editing and formatting
- Free revision, title page, and bibliography
- Flexible prices and money-back guarantee
Economic Growth
Economic growth is measured as a percentage rate of increase in real gross domestic product, or real GDP. GDP is a measure of a country's economic activity. There are three ways of measuring GDP– the most common is measuring all the services and goods produced in a year (or any other period) (Lecture Notes week 2). The growth of the US is likely to slow significantly in 2019, from a recent pace of 3.5% to roughly 1.75% estimated by the end of the fiscal year (Goldman Sachs, 2018) I assume this will occur due to a high possibility of “tighter financial constraints and a fading fiscal stimulus” (Goldman Sachs, 2018). Another key reason why this slowing is likely to happen will be as a result of increasing ‘trade wars’ the US is having with other countries. The current administration has implemented a series of tariffs on imports to increase the competitiveness of US-produced products and thus increase domestic demand and growth of US companies. There are concerns that this trade policy ‘could have damaging effects beyond the US economy, trigger retaliatory responses, and undermine the open, fair, rules-based multilateral trading system. (IMF Country Report No.18/207, July 2018). This 2019 outlook may be a reduction from previous years but the rate of growth, 1.75% is still seen as a healthy level of growth and should underpin solid short-term prospects for the US economy. This slowing in economic growth will have a direct impact on fiscal dividend as with a slow in economic growth it will mean tax revenue will be lower. This slowing in growth also tends to lead to a higher percentage of unemployment but, as seen directly, economists to not think this disadvantage is going to affect the US economy in the near term.
Unemployment
The level of unemployment will have a direct effect on the overall prospects of the economy because, for a healthy economy, you need high levels of consumption. If more people are out of work, then there will be less consumption. Unemployment can be measured in several ways, the most common is looking at the unemployment rate which “is a ratio of the number of people counted as unemployed to the number considered to be in the labor force, which includes everyone who has a job or wants one” (Economist, 2018). In 2018 the unemployment rate in the US was at 3.7% and is projected to fall to 3.5% by the end of 2019. This projection is far lower than the Federal Reserve’s 6.7% forecast. The rate has been reduced because hiring has been increased to support economic growth and because of a drop in the ‘labor force participation rate’ to c63% which is the percentage of people currently; ly employed or in search of a job. If the unemployment figures are as projected, then this will affect the overall economy positively as it gives opportunities to Americans in the margins of the labor force and a low unemployment figure will force employers to raise overall wages to attract and retain workers. These increases in wages will lead to higher consumer spending which supports a growing healthy economy.
Fiscal policy
The US’s fiscal policy in the coming years will also have a direct effect on the prospects of the economy. Fiscal policy involves the government changing the levels of taxation and government spending to influence aggregate demand (AD) and the level of economic activity (Pettinger, 2017). Fiscal policy has several key objectives which are; to stimulate economic growth (especially in times of a recession), to keep inflation as low as possible, and to work with monetary policy to stabilize the economy. In recent years the US has increased government spending combined with a lowering of taxes which has led to an increase in the budget deficit. In other words, the US has a ‘loose’ fiscal policy. In simple terms, the government has increased its investment costs and reduced its income, from taxes to stimulate growth in the economy. Whilst the current fiscal policy in the US is one that will be good for the economy in the short term as it is stimulating economic growth and with lower taxes encouraging spending, there is concern around the sustainability of this loose fiscal policy in the long term.
Interest rates
The level of interest in the US is set by the Federal Open Market Committee (FED) and it decided to set the current interest rate on December 19 to 2.5%. It is predicted that the Fed will raise the interest rate to 3% in 2019 to reduce the money supply, cool the economy, and curb inflation associated with an overheated economy. The theory is, that the rise in interest rates will both encourage saving and mean that consumers will not have as much disposable income to restrict their spending. This will also affect demand, and therefore earnings, in most businesses and have a direct effect on the prospects of the economy as businesses will have to cut back on investment for things like new equipment, leading to a slowing in productivity. Overall, the use of this monetary policy tool by the FED will take 6-12 months before it will truly start impacting (slowing) the economy which will allow time for the Fed to review its position and potentially adjust the rate to re- balance the economy over the longer term. This forecast rise in interest rates is directly related to why the overall economic growth figure is projected to slow.
Inflation
“inflation is a rise in the price of goods and services we buy” Lecture notes 3. There are two main ways in which you can measure inflation and they are the; Consumer Price Index (CPI) and the Producer Price Index (PPI). Goldman Sachs suggests that due to there being less overall growth forecast this will lead to an increase in inflation. “While recent inflation readings have been soft, we expect to reach 2.25% by the end of 2019” (Goldman Sachs, 2018) This increase should be seen because underlying inflation trends have risen, wage growth is seeing a rise, there are new bottlenecks and capacity constraints in product markets, additional tariff rounds with a greater focus on consumer goods and new state-level sales taxes. Inflation will also be impacted by the levels of unemployment as with low unemployment wages of the regular worker will increase as the demand for labor outstrips supply. This in turn will potentially fuel greater inflation as the businesses will look to pass on the cost increases to their customers in increased prices. . A rise in inflation causes uncertainty within these businesses because they cannot be sure what their costs and prices are likely to be. “The biggest risk investors face today is inflation, said Graham Summers, president, and chief market strategist at Phoenix Capital Research in Washington, D.C”. This uncertainty could also lead to a lower level of capital investment as well as a reduction in the competitiveness of US producers in the international markets as they will have to raise their prices and will likely be less competitive against far eastern producers like China. This will also clearly affect the prospects of the economy in the US because it has many businesses that trade in the international market.
Potential threats
There are some key threats that economists have identified that may alter the state of the US economy for the worse in the coming years. The main and most significant threat economists see is the trade tensions Trump has created with China “About 47.3 percent of the economists surveyed by the WSJ said the continuing conflict between the U.S. and China was the biggest economic risk of 2019.” (Drew, 2018) This ‘trade war’ started back in 2017 when the US launched an investigation into the Chinese trade policies and decided to impose tariffs on billions of dollars’ worth of Chinese products last year and Beijing retaliated. The US at the moment has imposed three rounds of tariffs on Chinese goods, totaling more than $250bn, and Trump has recently threatened tariffs on another $267bn worth of goods, which could result in all Chinese imports being subject to tariffs. Beijing has decided to put tariffs of their own on $110bn of US goods and accused the US of “starting the largest trade war in economic history'. (BBC, 2019). The reason Trump has pushed for these tariffs is in an attempt to make domestic US producers competitive and thus US-made products cheaper than imported ones which in turn encourages consumers to buy American products. This, in theory, should be very beneficial to the economy but, according to the IMF this ‘trade war’ has the potential to “weaken the global economy” (BBC, 2019). The IMF has even decided to lower its forecast for global growth in 2019 and 2020 as they believe that the ‘trade war’ would put a significant dent in economic recovery. This is a threat to the global economy and especially to the US economy if, in a worst-case scenario the ‘trade war’ continues and gets worse. This looks more likely according to Trump's tweets; 'There will be great and fast economic retaliation against China if our farmers, ranchers and/or industrial workers are targeted!' (Tweet)
Another threat that may have a major effect on the economy is the potential conflicts that may appear between monetary and fiscal policy. These two key policies need to work with each other to maintain a healthy economy but at the moment with the US following such a ‘loose’ fiscal policy this may cause issues in the long term. This type of fiscal policy will add to an already unstable public debt, contribute to a rise in global imbalances, and increase risks of future recession, with possibly negative outward spillover. This planned stimulus also will mean that the Federal Reserve will need to raise policy rates at a faster pace to achieve its dual mandate. Without clear communication on plans between the two policy areas results could end in a huge rise in inflation and potentially the next big recession.
Conclusion
Overall, the prospects for the US economy are a little uncertain because of the ongoing ‘trade wars. Projections like; a level of healthy growth of around 1.7% by the end of 2019 show potential for the prospects of the economy to be good as this is still a healthy level of growth even though it is a decrease on the higher level of growth they were seeing. This growth has decreased due to the factors affecting the economy in 2019, like tighter financial constraints and the ‘trade wars’. Furthermore, unemployment is projected to see a further fall to 3.5% by the end of 2019 which means more consumers will have disposable income to spend on products to spur the economy which will be a positive for the economy as Trump is trying to encourage consumers to buy American made products by making imported products more expensive. This lower level of unemployment should see a rise in wages which will drive inflation. An increase in interest rates will also encourage consumers to save more, especially when partnered with an increase in inflation, which will slow the growth of the economy. Trump aimss to help domestic US businesses by making imported products more expensive than those made in America but, with underlying inflation increasing product prices, in reality, this may not occur. All these factors mean that the prospects of the US economy may not be as good as seen at first glance and many economists expect a recession by 2021. With the forecast weakening and uncertain outlook for the US economy outlined above, particularly when it comes to its trade policy (tariffs) I would recommend now is not the right time for the company to launch a new product in the US. I would recommend a six-month delay of launch and then review as it will be clearer if Trump is likely to put tariffs on the product being imported to support his objective to improve the competitiveness of the domestic producers. We should also have a better understanding in six months as to any impacts on UK – US trading for the product to be launched that result from the current Brexit negotiations.
Stuck on your essay?
