Disappointing Growth for the US Economy

While much of the world is looking to the United States to provide much of the impetus for growth economic growth in 2016, the world’s largest economy ended 2015 on a down note.  Going into last year, expectations had been high that economic growth in the US would continue to accelerate over the course of the year, bringing growth rates that had not been seen in the US in over a decade.  However, a winter-induced slump in early 2015 and a slowdown in growth over the second half of last year resulted in growth once again failing to reach expectations.  Moreover, with so many factors now working against the US economy, there are fears that 2016 could be yet another year in which growth rates in the United States fail to reach their potential.  In addition, there is an increasing likelihood that the growth ceiling in the US has fallen from pre-crisis levels, limiting the US’ growth potential much as has occurred in many of the world’s other leading economies.

Initial estimates indicate that the United States economy grew by just 0.7% on an annualized basis in the fourth quarter of 2015, a significant reduction from the 2.0% growth recorded in the third quarter of last year and the 3.9% growth achieved in the second quarter.  Moreover, the US’ year-on-year GDP growth rate fell to 1.8% in the fourth quarter, the first time that it fell below 2% since early 2014.  As a result, the United States economy grew by 2.4% for the year in 2015, the tenth consecutive year in which annual GDP growth in the US has failed to reach at least 3%, the first time that this has happened in the country’s history.  Growth in the fourth quarter was driven primarily by the continued increase in consumer spending in the US, although the level of consumer spending growth trended downwards in the latter part of last year.  In contrast, business investment levels slumped in late 2015, due in large part to the fall in the price of oil and other natural resources.  Furthermore, a strong US dollar continued to erode the country’s export competitiveness, and demand levels in many of the US’ leading export markets remained weak, adding to the downwards pressure on the US economy late last year. 

If any single word can define the state of the United States economy at present it must be uncertainty.  Currently, nearly all sectors of the US economy are faced with a high degree of uncertainty and this is playing a key role in the slowdown underway in the US.  Among consumers, there is a great deal of uncertainty about the state of the US economy, due in no small part to the negative election campaign that is underway across the country as well as the fact that share prices have fallen significantly in the US in recent months.  The business community is also facing a great deal of uncertainty at the moment, as the dramatic fall in the price of oil is having a major impact on the once-expanding oil and gas industry in the United States, a development that is now impacting a wide range of US-based industries and service sectors, leading to lower levels of business investment.  Finally, investors are also faced with an increasing degree of uncertainty, stemming from developments both inside and outside of the United States, and this has been the key reason why share prices have trended downwards in the US in recent months, as investors have grown nervous about growth prospects over the near-term. 

Altogether, there are number of reasons to be concerned about the health of the United States economy in 2016 and beyond.  Nevertheless, consumer spending levels in the US are likely to recover over the course of this year and this will prevent the US economy from experiencing a deeper slowdown.  In fact, economic growth rates in the United States in 2016 will likely be near this year’s level and could even rise to a slightly higher level if business investment levels rebound later in the year.  Furthermore, while the US dollar is expected to remain strong against most other currencies this year, there is hope that some of the US’ key export markets will recover to a degree this year, helping to offset the US’ loss of export competitiveness.  Finally, there are hopes that productivity levels in the United States will rise in 2016 after having stagnated in recent years and if major gains in economic growth will be achieved in the coming years in the US, productivity and innovation will have to be the key drivers of this growth.  As such, while economic growth rates in the US will fail to reach the highs of previous decades, there is little likelihood at present of a major slowdown in the US economy this year.  Instead, the US economy will continue to grow at levels of between 2% and 3%, which has become the “new normal” in the post-financial-crisis United States.