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U.S.: As Good As It Gets?


  • Strong economy, for now.
  • Some positive signs.
  • Outlook for Fed policy.

By James Knightley, Chief International Economist

Strong economy, for now

Ten years on from the global financial crisis and it is safe to say that the US has come out in a far stronger position than most other major economies. Output is up 23% from the 2009 trough, while there are over 20 million more people in work. Inflation is broadly consistent with the Federal Reserve's mandate, interest rates have been increased, the central bank's balance sheet is being run down and the dollar is in the ascendancy. 2018 has been a particularly good year, with the US economy likely expanding at the fastest rate for 13 years and the unemployment rate falling to a 49-year low. The key question for markets, as underlined by recent equity weakness, is how long can this continue?

In the near-term, the story remains very positive. There is broad-based momentum in the economy with huge tax cuts providing additional thrust. Given this environment, the Federal Reserve chose to raise its policy rate corridor in each of the first three quarters of the year with another rate rise looking highly probable in December. After all, the economy is booming, inflation is at or above the 2% target on all the key measures and the jobs market is finally generating wage pressures.

However, the US economy will face increasing headwinds in 2019 as the lagged effects of higher interest rates and a stronger dollar act as a brake on activity. The support from the fiscal stimulus will also gradually fade, with the split Congress mid-term election results limiting the chances of additional significant tax cuts or spending increases. Then there is the weaker global growth outlook, with Europe and Asia seeing clear signs of slowdown. Intensifying trade protectionism could exacerbate the softening trend.

Recent Federal Reserve

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Comments (5)

Not surprising that more domestic investment in expanding business when so much uncertainty about supply chain, trouble finding qualified employees, and global economy slowing that may ultimately affect the US if it is not already doing so. How do you expand your soybean farm when you cannot even harvest economically?
Fed and China now in a box and all I am seeing here is mostly negative, hand wringing commentary. A great sign for a 10-15% upside in the markets into Q1.
Doubtfully. The damage from the trade war and tariffs to date has already been done to margins and demand for the next few quarters AND the 10% tariffs are not set to go anywhere. Furthermore, we all know who the President is and how his decisions can change based on what side of the bed he woke up on. This short lived rally will present a great opportunity to go short on.
We actually agree. I believe it would be good to raise cash into the the near term 10-15% run. Of course you can also go the shorting route as well. I prefer the former.
fzr100098 profile picture
everything will be up 5-10% Monday after Xi meeting - short sellers are going to get CRUSHED
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