Is the US economy Recovering?
There has been plenty of talk around the US economy and whether the economy has in fact started recovering or is still struggling behind the rest of the world’s economies. The world’s largest economy without a doubt, prior to COVID-19, was flying high with the unemployment rate dropping to new lows not seen since the 1960s. In addition to the unemployment rate, the US Dollar index reached its highest level in 3 years and at the beginning of the crisis reached the highest level since 2004.
Looking at more recent price movements, the US Dollar has managed to slightly increase over the last 2-3 weeks leaving traders wondering if the tide is turning in favour of the US Economy. As part of this blog we will look at the US economy, hopefully clearing up some questions the market has in relation to the US Economy.
The Driving Force of the US economy
According to the most recent reports, the main drivers in the US economy in terms of making up the highest percentage of the final Gross Domestic Product figure and employment are the following:
Health Maintenance and Medical products – according to most, one of the most important industries for all economies. For the US, the sector added 2.8 million jobs between 2006 and 2016, which was a rate almost seven times quicker than the overall economy and now with COVID-19 the question is if the industry will rise even faster. There has been a 20 percent growth in health care sector jobs since 2008, while the average rate for the economy was only 3%. As a share of the nation’s Gross Domestic Product, health spending accounted for 17.7% in 2018.
Technology based companies – The technology industry is a huge component of the U.S. economy and is rapidly increasing. According to Cyberstates 2019, an annual analysis of the nation’s industry published by CompTIA. Employment among computers and IT is projected to grow 11% from 2019 to 2029, faster than the average for all occupations.
Construction industry – Construction in all areas is a growing industry. According to the Bureau of Labor Statistics, construction and extraction occupations are projected to grow by 4% from 2019 to 2029, which is about as fast as the average for all occupations, and are expected to add nearly 300,000 new jobs.
This year when we witnessed the unemployment rate reach new lows, we saw the highest gains in employment in the following industries:
Professional and business services – added 76,000 new jobs
Construction – added 33,000
Healthcare – added 27,000
One of the main concerns, for investors which cause a lot of strain on both the economy and the US Dollar, is the unemployment rate. The unemployment rate hit almost 15% in May which is the highest we have seen recorded in the last 70 years. However, it should be noted that since the poorly received figures, the unemployment rate has managed to drop for 5 consecutive months and the rate is also predicted to drop in September. Currently the figures have dropped down to 8.4% and it’s predicted to decrease to 8.2% on the next release.
Compared to unemployment in the EU and the UK the figure is still quite high. Both the EU and the UK have a much lower unemployment rate but at the same time their unemployment has been increasing, whereas in the US it has been decreasing.
Traders are likely to pay strong attention to this week’s NFP figure and the unemployment rate which is due to be released this Friday. This is likely to create a lot of volatility in the US Dollar. The figure has been recovering but will it continue to recover?
Gross Domestic Product
GDP is a major economic indicator which is used as an indication whether the economy is growing and healthy. The next GDP figure will confirm whether the US Economy is in fact recovering and at what pace. The calculation to work out the GDP is:
Consumptions + Investments + Government Expenditure + (Exports – Imports) = GDP
Without doubt, the US’ GDP has taken a big hit over the past 2 quarters. The market has already priced this into the exchange rate, and for this reason traders are looking at the next announcement to calculate the strength and momentum in the US recovery.
Jim Bullard, president of the Federal Reserve Bank of St. Louis, said on Thursday the U.S economy may reach “a sort of ‘full recovery’ by the end of 2020”. There has been similar talk by other Federal Reverse members, but the figure cannot be guaranteed until officially released.
The market will start producing predictions for the next GDP figure and the exchange rate will be affected by these predictions. Hence, the importance to keep up with the next GDP announcement. If the figure is higher than predicted the US Dollar exchange rate is likely to find support. At the same time it may be an indication of a strong recovery.
The latest Developments
The US currency this week is weakening against the pound and the euro but is strengthening against the Japanese yen. Only on Wednesday we saw a slight change in price movements, where the movement was overall in favour of the USD.
Investors are now focusing on negotiations between representatives of the Democratic and Republican parties on new financial incentives for the American economy. Yesterday, the Democrats presented a bill worth USD 2.2 trillion. This is a drawback, as the Democratic Party initially required USD 3.2 trillion in spending, but President Donald Trump’s administration is only willing to approve USD 1.3 trillion in incentives.
Steven Mnuchin and Nancy Pelosi are set to discuss new proposals today. In addition, during the day, the first debate between US presidential candidates Donald Trump and Joe Biden will take place, which could also trigger a noticeable market reaction.
Overall, the market is waiting for the NFP figures to be released this Friday and the quarter GDP figure is due to be released in the coming weeks. As usual this is likely to be the major announcement and one of the biggest drivers of the economy. The Non Farm payroll figure is predicted to be 900,000 and the unemployment rate to drop from 8.4% to 8.2%.
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