US winning economic race with slow and steady run

WASHINGTON • Not long ago, the United States was considered the tortoise of the world economy, at least when compared with emerging powers like China and Brazil.

Lately, however, slow but steady seems to be winning the race. The US economy continues to chug along, while the one-time hares in Asia, South America and elsewhere are flagging.

The latest evidence of this shift came on Thursday, as the Commerce Department revised sharply upwards its estimate of economic growth in the second quarter to a healthy annual pace of 3.7 per cent, from an initial estimate of 2.3 per cent. At the same time, the US Labour Department, in reporting another drop in weekly unemployment claims, provided further evidence that the job market is on the mend.

The positives

Stocks on Wall Street jumped nearly 2.5 per cent on Thursday, following a broader 4 per cent rebound on Wednesday. Oil prices also rallied almost 10 per cent to settle above US$40 a barrel after sinking to post-recession lows earlier in the week.

In a separate report on Thursday, the Labour Department said initial claims for unemployment benefits fell 6,000 last week to 271,000 - a level that suggests the labour market remains on a solid footing. When the Labour Department reports the latest figures for hiring and unemployment next Friday, Wall Street is looking for a gain of about 200,000 jobs, and expects the unemployment rate to remain flat at 5.3 per cent.

"The United States, more than any other developed economy, relies on demand within our own borders," said Northern Trust chief economist Carl R. Tannenbaum in Chicago. "While the focus in the past three weeks has been on international instability, this should position us to withstand the consequences of recent market volatility," he added.

With markets remaining on edge, investors are already turning their attention to coming data about the economy's course, which will help determine whether the US Federal Reserve will make its long-awaited move to raise interest rates next month, or wait until later meetings.

Moreover, the impact of the recent plunge in stock prices on the broader economy will not be known for some time.

Growth data for the current quarter will be released in late October. The cut-off date for data for the Labour Department's report on hiring and unemployment in August, due next Friday, was this month, before the stock market correction took hold.

Still, far from the anxious trading desks in New York, many US executives in the business trenches report that growth has not wavered in recent months, and has even picked up in some cases.

"We have returned to pre-recession levels, and we expect volume for the entire year to be above where it was back then," said Mr Jon Slangerup, chief executive of the Port of Long Beach, the country's second-largest port. "There is tremendous consumer demand here, and we're seeing a real surge in volumes."

Cooling Asia

Much of what stevedores in Long Beach and other ports are hauling are consumer goods, like electronics and apparel, that are being imported into the US, but the economic situation in the countries that produce those products is not nearly as cheerful.

Chinese output certainly is not shrinking, but the pace of expansion in what is now the world's second-largest economy is clearly cooling down.

And that is sending shivers through emerging markets in South America and Asia as well as in more developed economies like Australia, as China's seemingly limitless appetite for iron ore, bauxite for aluminium and other commodities slows. Japan has faltered once again, and European economies have been in and out of recession in recent years.

While the German economy remains healthy and unemployment is relatively low there, Germany's dependence on exports makes it more vulnerable in the face of weakening demand from China and its neighbours on the European continent.

As a result, companies from other countries are showing greater interest in acquisitions in the US to increase their exposure to the faster-growing North American market.

Solid data

Much of the jump in overall economic activity during the second quarter, from an initial estimate of a 2.3 per cent growth rate, came from strong spending by businesses looking to expand factories, buildings and other physical structures.

Other tailwinds included a better trade picture, as net exports improved, and increased government spending, especially at the state and local levels. Companies also added to their stockpiles of goods, which could weigh on growth in the months ahead. Real private inventories increased at a US$121.1 billion (S$170 billion) pace in the second quarter.

In a separate report on Thursday, the Labour Department said initial claims for unemployment benefits fell 6,000 last week to 271,000 - a level that suggests the labour market remains on a solid footing.

When the Labour Department reports the latest figures for hiring and unemployment next Friday, Wall Street is looking for a gain of about 200,000 jobs, and expects the unemployment rate to remain flat at 5.3 per cent.

Normally, that might be enough to nudge the Fed into action, but the plunge in overseas markets and the correction on Wall Street has blurred that timeline.

Speed limits

Many experts now expect policymakers to wait until December. The uncertainty over the central bank's course has prompted investors and economists to put each new data point under a microscope.

Yet, for all the zigs and zags of economic data over the past couple of years, the underlying growth rate has not deviated much from about 2.5 per cent to 3 per cent annually, according to Mr Nariman Behravesh, chief economist at IHS, a private research and forecasting firm.

"Historically, this is a modest growth rate," he said, explaining that the US economy now faces what he called "speed limits", including the retirement of the baby boomers, slower population growth and weak productivity gains recently.

"Would we like to see faster growth? Of course," Mr Behravesh said. "But we're growing twice as fast as Europe and three to four times as fast as Japan. For a mature economy, this is about as fast as we can grow, and it's something we can feel good about."

NEW YORK TIMES

A version of this article appeared in the print edition of The Straits Times on August 29, 2015, with the headline 'US winning economic race with slow and steady run'. Print Edition | Subscribe