Monday, July 30, 2012

U.S. Economic Growth Slows Down

Sources:
FT: U.S. Consumers Cautious on Spending
FT: U.S. Factory Orders Increase in May
FT: U.S. Factory Output at Three-Year Low
FT: U.S. Manufacturing Activity Drops Sharply
NPR: “This Is Not Good”: Factories Show Signs Of Slowing
WSJ: Factory Slump Reaches U.S.

In the beginning of July, the U.S. government released reports showing signs of economic growth slowing down in the country. First, U.S. manufacturing shrank in June for the first time in three years. The Institute for Supply Managements (ISM) said that its index of manufacturing activity fell from 53.5 in May to 49.7 in June. A reading below 50 is an indication of contraction—a decline—in the economy. Anything above 50 signifies an expansion of the economy, or an increase in the level of economic activity and of goods available in the marketplace. This is the lowest reading on the index since July 2009, a month after the recession officially ended. Manufacturing accounts for 12% of the U.S. economy and has been at the forefront of the country’s recovery.

There are many reasons for the contraction in U.S. manufacturing. Americans have cut back on spending which has led to lower demand of manufactured goods. In addition, Europe’s economy is in a recession, which has hurt U.S. exports, because Europeans are buying less goods in general and thus less American-made goods. A recession is a general slowdown in economic activity occurring when the country’s gross domestic product (GDP) declines for two or more consecutive quarters.. It also appears that U.S. manufacturing is likely to stay weak for the next few months as the ISM’s new order index plunged from 60.1 to 47.8. The new order index reflects the levels of new orders of goods and products from customers of manufactured goods. Although this measure is traditionally volatile, such a sharp decline could signal a downturn in the demand for U.S. products overseas. It is the first time this index number has fallen below 50 since April 2009, when the economy was in a recession.

The fewer amount of new orders in manufacturing has left many businesses concerned that U.S GDP growth will further decline. This fear stems from the recent decline to a 1.5% GDP growth rate in the April-June quarter from a 1.9% rate found back in the January-March quarter. U.S. businesses are also concerned about Europe’s financial crisis and the possibility that U.S. lawmakers will not extend a package of tax cuts at the end of the year. Thus, U.S. companies are cutting back on manufacturing and purchasing as well as not increasing their hiring to prepare for a downturn of orders from Europe and higher taxes. Another concern of U.S. businesses is that European manufacturing has remained at its weakest level in three years and continued to decline in the month of June. Meanwhile in other parts of the world, a recent survey shows that China’s industrial sector expanded at its slowest pace in seven months.

U.S. consumer confidence decreased to its lowest level of the year at 73.2% in June, which was another reason for the slowing in manufacturing. Consumer confidence is an economic indicator, which measures the degree of optimism that consumer’s feel about the overall state of the economy and their personal financial situation. In a recent survey given to 5,000 U.S. households, it showed that consumers are concerned about slowing job growth and increasing unemployment. The unemployment rate in June was at 8.2% up from 8.1% in April, with the U.S. economy adding only 69,000 jobs in the month of May and only 80,000 in June. The sharp drop in the ISM index will not help the situation, as it will trigger speculation that the U.S. economy may fall into recession.

In an effort to kick-start the economy, the Federal Reserve extended “Operation Twist,” in which the government sells short-term bonds while buying long-term bonds. The aim of the program is to lower long-term interest rates. By selling shorter-time bonds and using the money from the sale to purchase long-term bonds, the government will increase demand for the longer-term bonds, which in turn will drive up the price of those bonds, and lower the rate of return (yield) of such bonds. The relationship between bond price and yield is inverse, thus as bond prices increase, yield decreases.

Additional signs that America’s economy is feeling the impact of slower growth in China and continued unrest in Europe could cause the U.S. central bank to take more aggressive action , including purchasing financial assets (such as bonds and stocks) as a way to inject more money into the economy. Injecting more money into the economy means that banks will have more cash to lend to each other, to companies, and to any consumer making a large purchase like a car or house. The fall in manufacturing will be of concern to Barack Obama’s re-election campaign as well as his rival Mitt Romney.

1 comment:

QUALITY STOCKS UNDER 5 DOLLARS said...

The american economy is in really bad shape