How can various economic indicators impact the US?

What can stunt US economic growth? (Part 11 of 11)

(Continued from Part 10)

A note

In this series, we looked at several indicators that display different aspects of the US economy. Some are stable, but may have a negative bias while others are not looking as good as we expected. This is not to imply that we expect them be worse off than they are. It just means that if the negative bias wins over growth going forward, they will have a major negative impact on the US economy. But apart from affecting the GDP (gross domestic product), they will also affect US monetary policy.

Effect on monetary policy

In its latest statement, the US Federal Reserve voted 10–0 for the monetary policy stance to remain accommodative for some time. Although several Fed officials maintained that the central bank remains on course for raising the federal funds rate this year, the decision and its timing aren’t cast in stone.

The Fed is positive about the US economy and the job market. Its concerns are broadly centered on the tepid inflation growth. The latest release of US personal income and spending showed that PCE (personal consumption expenditures) inflation, which the Fed tracks, fell to a 0.7% pace in December, compared to a 1.2% rise in November. These readings are way below the Fed’s long-term target of 2%—and they are slowing down.

2015 interest rates

If the indicators outlined above either become stalled or worse—report negative growth—then it will make an interest rate hike in 2015 very difficult. Although this may benefit Treasuries (TLT) (IEF) (SHY), it will have grave negative consequences for equities (SPY) (IVV). It may also cause volatility in financial markets, which are expecting a mid-year rate hike. A rise in volatility would benefit the iPath S&P 500 VIX Short Term Futures ETN (VXX), but would also cause instability in financial markets.

With most things currently going its way, the US economy would be well-served if these aspects follow suit rather than chart a different course.

Browse this series on Market Realist:

  • Part 1 – The US economy is the ‘last man standing’ among advanced nations
  • Part 2 – Was the slow US economic growth in 4Q14 a blip?
  • Part 3 – Can consumption do it without investment for the US economy?