The US economy stagnates!
There has been a definite enthusiasm in the US economy following Donald Trump’s major victory in the US Presidential Election of November 2016. Since then, the Dow Jones has been hitting record highs every week, even crossing the 21,000 mark.
But the fact is the GDP growth in 2016 was only 2.95 percent, this was the worst America has had since 1959. There are other critical signs that indicate that the US economy has been floundering.
Let’s see why.
Sign #1: The Credit demand is going down.
Across the US, the credit demand is turning negative for bank lending. There seems to be little pent up demand for loans in the economy. The number of people taking consumer, business and real estate loans has stagnated and nobody has been able to say why.
Remember, the US is a consumer economy – consumption makes up for 70 percent of all financial activity in the US. So if the consumption was to go down – which the fall in credit demand indicates – then the economy may well be on the verge of slowing down.
Sign #2: Tax receipts are getting lower.
The sign of a healthy economy is higher revenue earned from corporate taxes. However, in the US, the corporate tax receipts are going down. Nobody has been able to explain why in a reasonable manner.
As Dr. Lacy Hunt of Hosington Investment Management says, “This indicator has turned down prior to every post-WWII recession. It suggests that America’s corporations are experiencing a deterioration in earnings.”
Sign #3: The Federal Reserve has been very active.
One reason why Alan Greenspan is considered to be the greatest chairman of the Federal Reserve in history was that he did nothing – he did not tinker with the interest rates, kept the interest rate low and let the economy do its thing. Greenspan was of course the chairman of the Federal Reserve during the 1990s, when the US economy was very strong and booming.
Today, the current chairperson of the Federal Reserve Janet Yellen has been taking the opposite route. She has been actively managing the monetary policy and raising interest rates gradually. Higher interest rates are good for saving but bad for fuelling consumer demand.
As Dr. Lacy explains, “When the Fed tightens, they are saying the economy is doing too well by our standards… we want the economy to have less money and credit growth and we want less economic activity. They are saying this at a time when the best economic indicators are in a downturn.’’
Sign #4: The US Treasure bond yields are flattening out.
The US Treasury bonds are considered to be the safest investment in the world. These bonds run for 30 years and are considered to be the benchmark for the US economy. Right now, it seems that the Treasury bonds are flattening out, and have a lower yield curve than before. The Treasury bond yield has been down by 15 basis points this year. This goes to show that all is now well with the US economy.
Author: Raghav Hegde – India