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U.S. Picks Up Steam, but not the Dollar
The U.S. recovery appears to be picking up steam over the past month, with unemployment down, consumer confidence up and inflation falling. Many other indicators used in the manufacturing and commercial sectors have also proven quite promising. And the Dow Jones has even jumped past 13,000 for the first time since the crisis began in 2008. Despite these positive indications, many experts warn that the U.S. economic recovery remains on fragile ground. A downturn in the E.U. or China could prompt a renewed decline, while rising gasoline prices due to the Iran threat could also derail the recovery. Finally, there are many internal problems, such as the level of debt, that have yet to be addressed.

SEE: Understanding The Consumer Confidence Index.)

Several Key Indicators Point Upward
The U.S. has seen a number of positive developments over the past month, ranging from higher manufacturing data to lower-than-expected inflation figures.

The Institute of Supply Management's (ISM) Purchaser Manager Index (PMI) showed its 30th consecutive month of growth (defined as a reading above 50%) and its third consecutive month of improvement (defined as a reading higher than the previous month). The January rating of 54.1% suggests continued growth in the manufacturing sector, which is widely viewed as a leading indicator for the economy as a whole.

Figure 2: U.S. PMI Data


SEE: Using The ISM Manufacturing Index To Find Forex Trends

Despite rising gasoline prices, inflation rose just 2.93% in January, which is well below the 3.16% average seen in 2011. Meanwhile, the consumer price index (CPI) – a highly watched gauge of inflation – rose just 0.2% in January. The lower-than-expected figure included higher energy prices that were offset by lower food prices – particularly fruits and vegetables.

Figure 3: U.S. CPI


Unemployment and Confidence Show Improvement
The U.S. unemployment rate fell to 8.3% in January, its lowest in three years, as employers hired 243,000 new workers. At the same time, the number of people collecting emergency and extended payments dropped by 69,000 to 3.41 million. Combined, these data points suggest a robust recovery in U.S. employment.

Consumer confidence also increased for its sixth straight month, driven by strength in the job market. The index rose to 75.3 in February, which is up 0.4% from the last month, but down marginally from a year ago. A record number of people also reported that they were aware of improvements in the job market.

Despite these improvements, there may be more to the numbers than meet the eye. The unemployment rate fails to take into account the growing number of people exiting the workforce and no longer looking for work. Meanwhile, the consumer confidence survey showed that the actual incomes of these individuals were still declining for respondents.

Bernanke Comments Keep Dollar at Bay

Over the past month, the U.S. dollar has lost ground against most currency pairs. The movement comes after U.S. Federal Reserve Chairman Ben Bernanke indicated that the Federal Reserve would keep interest rates near zero until at least 2014. Since interest rates are a big driver of currency valuations, this resulted in a lower U.S. dollar across the board.

SEE: Top 7 Questions About Currency Trading Answered

Some economists even suggest that there may be a third round of quantitative easing – the Federal Reserve's purchasing of U.S. government bonds. But St. Louis Federal Reserve Bank President James Bullard indicated that this would only happen in the unlikely event that the economy proves weaker than the Fed's forecast and only if inflation falls excessively.

Externals Risks Threaten Recovery
The U.S. economy also faces a number of external threats that could derail its economic recovery. For instance, a failure to resolve problems in Greece or a slowdown in China could prompt a new global recession. Meanwhile, higher energy prices due to Middle East concerns could have a negative impact on consumer spending levels.

Greece's second bailout package may keep it alive for a few months longer, but many economists believe that the country remains on fragile grounds. Any failure to resolve the Greek crisis could result in widespread declines across Europe that would undoubtedly affect the U.S., since many U.S. banks hold significant European assets.

A Chinese slowdown is a second threat that could derail the U.S. recovery. In January, the country reported a 0.5% decline in exports – its first in two years – as well as a 15.3% decline in imports. This drop in Chinese consumer spending and exporting could be a bad sign for the global economy and ultimately derail the U.S. recovery.

SEE: Top 6 U.S. Government Financial Bailouts

Debt & Politics Remain a Threat
The U.S. economy also continues to face a number of long-term risks, including its own rising debt-to-GDP ratio. Recently, the ratio in the U.S. hit 101% with $1 trillion in new debt issuance ready to be put into force over the next nine months. And troublingly, it seems that China has begun to cut its holdings of U.S. debt in recent quarters.

Policymakers are also struggling with some near-term decisions that need to be made. According to Moody's estimates, a failure to extend the payroll tax holiday and emergency unemployment could impact GDP growth by as much as 0.7% this year. Meanwhile, enacting spending cuts could trim a further 0.8% off of real GDP growth. (For related reading, see What The National Debt Means To You.)

Next: Investopedia's Forex Outlook For March 2012: Other Economies: Japan, Switzerland and U.K. »


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