Question

• Describe your view of the current economic and investment market conditions and justify your views with facts

Answer 1

To understand the current market and investment conditions in US we need to know how US is performing on different parameters that define an economy's market and investment conditions:

GDP Growth: While the US economy returned to its pre-recession size in 2011, the pace of acceleration has been slower than in previous recoveries. A robust jobs market and still rising house prices are providing the ballast for an economy that is facing poor trade data, weaker growth overseas and retrenchment in the once booming oil industry. The US recorded its slowest economic growth in five years in 2016, as poor trade data dragged on the economy in the fourth quarter.The recovery remains steady, rather than spectacular. Annualised Q4 2017 GDP growth is 2.9%

Bond and Currency Markets: Movements in the bond and currency markets are a barometer of investor expectations about a country’s economic prospects. Since the most recent US election, the bond market has reflected a consensus that the US economy faces an inauspicious future of lacklustre growth and muted inflationary pressures. Treasury bond prices have fallen sharply since Donald Trump’s election, driving benchmark yields to multiyear highs. Yields above 2.6 per cent mark the start of a secular bear market. The dollar remains buoyant against most major currencies. As the world’s reserve currency, a stronger dollar presents problems for many financial markets, from foreign holders of government debt facing higher repayments to producers of commodities that are priced in dollars.

Inflation: The Federal Reserve looks closely at its inflation target of 2 per cent, using it as a metric policymakers must feel ‘reasonably confident’ about before raising interest rates. Core inflation, which strips out the impact of food and fuel, is the metric most closely watched by policymakers to gauge whether domestic price pressures are increasing.

Interest Rates: A stronger economy has given the Federal Reserve cover this year to accelerate its pace of interest rate increases. Rates have been at rock-bottom levels since the financial crisis. While they are starting to rise, on the Federal Reserve’s own projections they will not return to pre-crisis levels in the foreseeable future. The effective rate is the average of what banks are actually paying each other, hence the fluctuations in the graph.

Productivity: Growth in the US though, along with many other western economies, has been alarmingly slow since the financial crisis. Since the economic crisis, productivity has risen only very slowly in the US. Economists disagree on the reasons, with explanations ranging from investment being too low, to the boon from the tech revolution dissipating to innovations not being measured correctly.

Labor Market: US job growth and employment have been strong, while wages have seen only small growth. This suggests there may still be some slack in the labour force.

Consumers: As the labour market has strengthened, so has US consumer spending. Wage growth has remained subdued, however. There are few signs of runaway spending growth, with consumers staying in a cautious mood. Sales however have firmed in recent months, suggesting some of that hesitancy is dissipating.

Current Growth Stats:

Real GDP Growth: 2.6%

Investment Growth: 3.6%

Unemployment Rate: 4.1%

The US economy is currently growing and expected to continue grow steadily over the next few years, outpacing many other western countries.