While we all know that the U.S. and the UK share a special relationship, there is also a strong correlation between the performances of the nation’s two economies. This has been in evidence recently, with both the Federal Reserve and the Bank of England (BoE) continuing to maintain artificially low interest rates as a way of stimulating economic growth. This is set to change next month, however, with impressive data sets and performance metrics highlighting a growing gulf between the U.S. and the UK.
This will come as a surprise to some, particularly given the uncertainty and market volatility initially caused by Donald Trump’s surprise election as the next President. This says more about the robust nature of the U.S. economy and the dollar than it does about Trump’s economic policies, of course, but the real estate mogul is the first incumbent since the early 1990’s who will inherit a labour market at full employment, as reported by Reuters.
The Latest U.S. Data and What it Means for the Economy
One of the most positive data-sets emerged in October, when new orders for manufactured capital goods rebounded impressively and a rate of 0.2%. This seemed to confirm the accelerated levels of growth that had first appeared during the beginning of the fourth financial quarter, with both consumer and business confidence on a decidedly upward trajectory. This was reflected by the fact that the latest CPI data showcased its largest increase in six months (by 6.6 points), with the electorate seemingly optimistic about the impact that Trump will have on their personal finance and savings prospects.
As if this was not enough, October saw the national unemployment rate fall to just 4.9% as an article by Trading Economics explains. The rate had increased marginally to 5% in September, but this proved to be little more than a temporary, almost meaningless, setback. Even more importantly, the number of American citizens actively filing for unemployment benefits remained proportionately low, despite rising slightly from the 43-year low that as achieved during September. This is a trend that reflects the strength and growth that exists in the current labour market, both in terms of job creation and the underlying motivation to work.
Elsewhere, the Commerce Department also revealed that total durable goods grew by 4.8% during October. This seems to highlight a prominent trend in the U.S. economy at present, as areas of strength continue to expand while weaker elements are beginning to rebound and grow incrementally. The depth diversity of America’s economic strength certainly bodes well for the future, particularly with increases in business spending and manufacturing capable of driving sustained growth for the future.
How Will the Economy Grow In 2017?
These data sets seems to reinforce the idea that the Federal Reserve will raise interest rates in December, in order to consolidate the existing levels of growth and gradually move away from quantitative easing measures. Given that this was already being discussed at the beginning discussed at the beginning of December, it is surely only a matter of time before the base rate is increased.
Before confirming interest rate hikes, however, there are other factors that the Federal Reserve may want to consider. After all, the aforementioned growth in business spending is not guaranteed to be sustained, with many experts keen to see how this metric performs during the remainder of the financial quarter. Even the best case scenario suggests that growth is likely to be sluggish and inconsistent, particularly as the dollar continues to showcase surprising strength.
After all, President-elect Trump was thought to favour a slightly weaker dollar prior to the election, while YAHOO Finance reported the value of the currency plunged when the result was first announced to the markets. It has since rebounded, however, thanks in part to the rise in capital goods orders and the growing belief that Trump’s economic policies will actually sustain a strong dollar. This could cause issues in terms of manufacturing and industrial sector growth over time, so it is a consideration that the Federal Reserve must keep in mind when they meet next month.
The Bottom Line
As OANDA have suggested within their forex trading analysis of the US elections “the greenback is boosted by the expectation of an interest rate hike in December”. This reaffirms the belief that the US economy is on an upwards trajectory at present. A nation’s economy is always at its most vulnerable after an election, however, and many of the recent, positive trends may reverse over the course of the next few weeks.
This underlying uncertainty will continue throughout Trump’s inauguration and first few weeks in office, so both investors (and the Fed) must leverage real-time newsrooms and feeds to monitor performance metrics and data sets over the course of the next few months. Otherwise, we may all be caught off guard if America’s economic recovery is suddenly derailed.
