U.S.Economy & Financial Markets

October 11, 2018

U.S.Economy & Financial Markets

Padmini Arhant

The Federal Reserve preparation to hike interest rates in December 2018 in consideration of historic lower unemployment and GDP forecasts is received cautiously with financial markets reaction to United States and China trade war alongside unnecessary economic sanctions against Iran and Venezuela having drastic impact on global economy.

The Federal Reserve move on gradual rate increase to maintain inflation at current 2 percent bearing low unemployment is a step focused on limited factors such as job and GDP data. However, the fact of the matter is there are other aspects with potential reverse outcome on Federal Reserve’s action to interest rates hike that merits attention.

On the job status, the unemployment figures might be impressively low. Nonetheless, the cash flow in the economy is still lagging in small and medium businesses and other areas of the economy involving direct consumer purchase such as the housing market and automobile industry.

In general, the consumer spending is fairly weak and reflected in retail industry poor performance with many brick and mortar stores struggling to survive in the anemic retail business. The retail figures at the end of holiday season this year will further indicate the condition one way or another. The conventional retail chains and big stores are facing tough competition from e-commerce with online giant like Amazon forcing  shutdowns on major retail stores unable to compete effectively given the popularity and convenience of online marketing.

The e-trade is a big challenge to standard retail business and that in a way controlling inflation on many goods and services in the market. Again, the purchasing power among majority of consumers in the middle and lower incomes category is static and even remain below the expected level despite low unemployment in the economy. One of the reasons behind this sluggish consumer spending is lack of fair income distribution.

Although the job market might appear to be favorable, the buying power among consumers on big budget items like home and cars as well as other essentials are nowhere near  anticipated market share with significant impact on construction industry and manufacturing sector.

On the international front, United States administration policy towards Iran and Venezuela is triggering currency devaluation in emerging economies like India and developing nations such as Pakistan, Turkey and countries in Latin America dependent on crude oil imports from overseas. The U.S. dollar pegged to oil trade, the strengthening of U.S. currency is mainly associated with global transactions in dollar and the alternative being euro depleting foreign currency reserves for most nations worldwide.

European economy barring Germany, Norway and few Nordic states are yet to recover from recession started back in 2007 and experienced until now. Many EU members like PIGS ( Portugal, Italy, Ireland, Greece and Spain) along with Eastern European EU states are not relieved from economic crisis and barely able to meet financial obligations amid EU enforced austerity contributing to depressed economic growth and development.

The debt saddled nations are driven towards debt servicing to enrich international monetary authorities and prominent bankers profiteering on the extraordinary debt burden of these countries confronted with liquidity crunch creating the dilemma of debt trap causing economic downturns for nations in this situation.

In the given scenario, euro as the optional trading currency is superficial posing needless strain on global economic activities especially in the backdrop of fragile European economy and United States politically motivated sanctions against Iran and Venezuela compounding the problems on the energy demands and supply chain for nations like India and China with massive energy consumption to fuel the economy. The other efforts in this context such as raising OPEC output to deal with United States sanctions on Iran and Venezuela do not satisfy market requirement that are already felt with unaffordable fuel prices in India, Pakistan, Sri Lanka and many parts of the world.

United States and Europe would be ultimately affected as the western multinational corporations are predominantly benefiting from global presence and operations right from production to sales, distribution and service  in many industries invariably exposed to common energy and economic issues striking the consumer base in Asia and other regions instrumental in boosting global economic progress.

The global economic regression is directly related to these unwanted events with immediate repercussions on allies and those behind the strategy. China trade war is another dimension with United States having granted the former MOST FAVORED NATION (MFN) status and many United States companies involved in manufacturing goods from China that are not only available in America but also in the global markets. China has long been the world’s central exporter and wholesaler with businesses from far and wide ignoring labor exploitation in addition to normal employment and environment violations in the profit-oriented system. As such, China’s reciprocation to U.S. actions are not without consequences for both economies engaged in mutual trade warfare.

Accordingly, discernment on decisions against China, Iran and Venezuela from the U.S. administration under President Donald Trump is critical to save the economy from possible meltdown in the aftermath of global economic decline that are visible in the wake of current account deficits among many nations trying to maneuver the difficult predicament of survival and resolution to impending economic woes generating anxiety in the global domain.

As for the Federal Reserve resolve to move forward on the overnight federal funds rates over the next year and beyond from the present 2 and 2.5 percent to about 3.4 percent to contain inflation at 2 percent would predictably slow the positive economic trend hurting prospects in the already suppressed housing market and retail sales as highlighted above.

The macroeconomic forecasts on United States GDP for third quarter at 3.7 percent and 2.6 percent for fourth quarter with the Federal Reserve revision showing higher growth figures based on the latest tax cuts and government spending prompting Federal Reserve position on premature rate increase neglect stagnancy in ordinary household income.

The mere job growth in the absence of affordable living standards confirm income disparity. The per capita average net income and cash flow determining consumer price index and inflation is trailing behind projections and proposed changes to rates could wipe the gains realized in the recession free economic span in the past decade until now.

In a nutshell, the exponential rise in minimum wage and average income i.e. per capita income in correlation with GDP is important besides minimizing joblessness in the economy prior to addressing inflation alone in the macro and micro economic management.

Thank you.

Padmini Arhant

PadminiArhant.com

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