Why The U.S. Economy Is Recovering

by: David Frank


Consumer prices in the U.S. for April recorded their biggest increase in nearly 10 months.

Trade balance data for March showed imports at $40.38 billion.

The dollar is more competitive today.

The U.S. economy is improving despite a brief stall from a harsh winter which saw sub artic temperatures and storms paralyze much of the country. We are seeing modestly higher inflation and an improving job market which is helping sentiment. However, this improvement could be bad for the rest of the world.

Data, last week, showed that consumer prices in the U.S. for April recorded their biggest increase in nearly 10 months. We are noticing something different in the rest of the world - Japan, which has been falling, and low prices as well in the Eurozone. The U.S. stock markets also continue to outperform their global peers as growth climbs back up.

The U.S. economy should only begin to accelerate further as we head into the summer months. While this is good news for the Federal Reserve and the U.S. economy in general, it could also pose some risks to the rest of the world. As the world's largest economy improves, it will become less of a factor behind global growth. Consumer spending is not likely to be robust and demand is likely to be for domestic goods rather than imports. This will hurt exporting nations, like China and Japan. These economies, particularly the emerging market economies, are reliant on the U.S. and will make them vulnerable going forward.

Trade balance data for March showed imports at $40.38 billion. However, before the fiscal global crisis in 2008, this number was over $60 billion.

However, there are some reasons to be happy about this recovery.

The weaker dollar is helping with this reshuffling of the trade balance. The dollar is more competitive today. Since 2002, the buck has lost one-third of its vale in real and nominal terms. This competitiveness is reflected in this rise of on-shoring, as demand for goods shifts from imports to domestic goods. This means emerging market economies like India, Turkey, Brazil, Indonesia and South Africa have to readjust their economies as trade data is unlikely to return to pre-2008 growth levels. This will take time and will translate to economies with excess capacity and slack, as the global economy readjusts to a new normal. Therefore, deflationary pressures which have been noticeable in recent inflation data is likely to persist into the near and medium term.

Another area of concern for the global economy is the United States' new found ability to produce its own energy resources from shale gas. Many U.S. politicians and economists feel this is the next industrial revolution. "Fracking," a colloquial term for hydraulic fracturing, has led to a new boom in gas and oil exploration as well as local production. This will give the United States a competitive edge and less of a need to import energy products. This should also, over time, reduce the price for gas and electricity to the consumer.

There are also persistent problems with trade financing. Companies find it nearly impossible to finance international trade deals. This sector has still not fully recovered and will force domestic companies to source more from their home country, in this case the U.S.

The world has changed. It is not what it was like in pre-2008 and during the global recession, which toppled banks and forced nations to spend. This caused debt problems in Greece and most of the Eurozone. We are seeing change, as the world's largest market place, which once spurred global growth, is beginning to look inwards. A good example of this can be found in the technology giant called Apple, Inc. (NASDAQ:AAPL). There is less of a demand for personal computers as consumers want smart phones and tablets. At the forefront of this, in the U.S., is Apple. This California-based tech giant has been helping to bolster U.S. growth numbers for quite a while and will do so going forward.

Investors should be looking at U.S. equities again. The contraction which is visible in the DJIA (16,606.27), as of late, is becoming smaller. We are noting both rallies and drops becoming smaller with highs and lows that are now within reach. There are two technical levels that should be watched. On the downside 16,300, and 16,850 on the upside. While still cautious trading at this level, a breakout above 16,900 would be very welcome. One should also pay attention to U.S. technological companies like Apple, mentioned above. As the trade balance shifts, these companies will come into play as revenues increase, helping the bottom line.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.