World Economy

US to Soon Face Big Tests

US to Soon Face Big TestsUS to Soon Face Big Tests

The Federal Reserve finally decided the economy was strong enough to handle the first increase in interest rates in nine years. Now what? Time to wait.

With just a two weeks left in 2015, the broad contours of the US economy are clear. Consumers are spending at the fastest pace since the Great Recession. Sales of new and previously owned homes are rising. And Americans are more confident. That’s some of the good news. The bad?

Business spending and investment–one of three legs holding up the US economy–still hasn’t returned to prerecession levels. And lately, companies have become even more cautious owing to a strong dollar that’s reduced US exports and a slump in oil prices that’s forced energy firms to slash jobs and investment, MarketWatch reported.

All of these trends will be apparent this week in reports on home sales, personal spending, orders for durable goods. Which means Wall Street and Main Street probably won’t get a better handle on the economy until early 2016–assuming the economy doesn’t get battered like it was last year by severe winter weather.

Most experts fall into two distinct camps. The majority expect an improved US economy to continue along the same path, with growth accelerating in 2016 to the fastest pace since the recovery began in the middle of 2009.

A stronger labor market, combined with cheap gas, are “fueling consumer spending, especially for autos and housing,” noted economists at Nationwide Insurance.

Auto sales, for example, are on the verge of hitting 17.5 million in 2015, eclipsing an industry record set 15 years ago.


A smaller clique of economists is more skeptical. Sure, they think the US will continue to grow at a moderate pace, but they don’t expect the economy to speed up a lot or trigger an upward spiral in wages that helps push inflation toward the Fed’s 2% target.

“We have 5% unemployment. The cost of mortgages has never been cheaper. Oil prices are at a 20-year low in inflation-adjusted terms. But where’s the boom?” asks Steve Blitz, chief economist at ITG Investment Research.

The skeptics believe the global economy has more sway than ever on what happens in the US. Take jobs. Companies can easily move overseas to take advantage of cheaper labor if the cost of hiring at home gets too high. That might explain why US wages haven’t increased as much in the current recovery as they have done in the past.

The role of China also casts a huge shadow. The Asian economic colossus is a big source of global demand for raw and finished goods, ranging from aircraft to farm goods to chemicals. The Chinese economy has slowed and while the US is more insulated, America hasn’t been entirely inoculated. When China catches a cold, America gets a sniffle.