US Economy Fundamental Analysis:
There has been a slowdown in the rate of real GDP growth rate as it grew more slowly at the rate of 1.1% during the first quarter of 2016 compared to the last quarter of 2015 when it grew by 1.4%. Accordingly, The Conference Board Leading Economic Index® (LEI), which is an index used to predict future economic activity, also showed a decreasing trend by posting a modest increase of 0.2% in May while April was higher at 0.6%. A reading of 0.1% for March exhibits that this indicator has been rather erratic as of late and going forward it would be worthwhile noting its movement, to analyze nature of economic headwinds given that three movements in the same direction suggest a turning point in the economy. Conversely The Conference Board Lagging Economic Index® (LAG), an indicator which affirms a recent peak or a trough in the business cycle, has posted an increase of 0.3% during May and this coincides with the general GDP uplift during the recent past and its future movements would also become relevant to point out slowdown in the GDP growth rate.
On a positive note the National Association of Realtors® have revealed that existing home sales sprung up during May, to their highest pace since a decade as supply constraints have persisted pushing the median prices up sharply. The only factor which may derail the future performance of this sector is deceleration of job growth which could impact consumer’s propensity to spend and thus future non-farm payroll statistics would become highly relevant from an analytical standpoint. Of importance would be the % increase in employment and also the change in unit labor cost which has sprung up to 4.5% and can be a deterrent for the production capacity to reach to it aggregate potential as producers may start constraining their output in the backdrop of increasing cost of production. The above graph depicts an economic cycle movement and it is apparent that GDP transcended into the positive zone during 2012 and it has followed that trend up till now, but the growth rates is negatively sloping for now, and if this trend is to persist, then then soon growth rate can dive into a negative territory, which could mean commencement of another contractionary economic cycle.
While the timing of FED’s next interest rate hike decision will have a strong bearing on how the US economy reacts to its imposition, it would surely stand as a measure on the strength of the economic fundamentals. Another external socioeconomic variable to contend with would the impact of Brexit because with the exodus of Britain from the European Union, an increasingly Balkanized EU can have detrimental impact on the extent of international trade. Britain stood as the main corridor through which US expressed its economic and political will in the region, and its exit could also impact American international trade agenda within the region. Also there is a trust gap that is being developed, as the less educated have been adversely affected the effects of globalization, who have become skeptical about the sincerity of establishments political will and agenda. This heightened level of ethnocentricity can in the broader scenario become impediments for freer trading environment, and the snow balling cycle of diminishing trust vis-a-vis economic returns can lead to socioeconomic challenges that can lead to the economic malaise, that many developed countries are facing nowadays.