Wednesday, August 6, 2008

US Economy Defies Gloomy Predictions - So Far

The Federal Reserve and US government have certainly done their best to try and avoid a long expected recession.
  • Interest rates slashed from 4% to 2%
  • Generous fiscal tax breaks for companies and consumers
Despite falling house prices and the impact of rising living costs, the Fed have increased their expectations for growth in 2008 from 1% to 1.6%. On face value economic growth of 1.6% is not bad for an economy, many assume is already in recession. But, the problem now is that there is little else left they could do to stimulate the economy.
  • Real Interest rates. - With inflation running at 5%, real interest rates are negative by almost 3%. If the Fed wants to maintain low inflationary credentials and end an era of lax borrowing, real interest rates surely need to rise rather than fall further. Even if they did cut nominal interest rates, the problem remains that banks will still be reluctant to lend because of the credit crunch.
  • Fiscal boost. Some are arguing for a second wave of fiscal tax cuts. But, government borrowing is already high and it is clear whether tax cuts can do anything other than provide a very temporary boost in spending.
  • Exports. The strongest sector for the US economy is currently exports. Helped by a weak dollar, US exports have risen strongly. However, with a slowdown in the EU and other economies this source of strength may soon be coming to an end.

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