A Good, But Not Great, US Economy

The United States economy is continuing its recovery from the Great Recession, as evidenced by its continued growth in the first half of this year.  In fact, the United States economy has regained its position as a key driver of global economic growth, a result of both the improving health of the US economy as well as the poor state of many of the world’s other large economies.  Nevertheless, the pace of the economic recovery in the United States has been disappointing and there are a number of risks that continue to hover over the future of the US economy.  Should the economic recovery in the US falter, or should the growth ceiling for the US economy fall to levels closer to those of Europe and Japan, the global economy as a whole will struggle to grow at a faster pace in the coming years. 

As expected, the United States economy rebounded from its winter-induced slump in the first quarter of this year by recording stronger growth in the second quarter.  During this period, the US economy expanded by 2.3% on an annualized basis, a slightly worse performance than had been expected, while the annualized economic growth rate for the first quarter was revised upwards to 0.6%.  Growth in the second quarter of this year was driven a combination of higher levels of consumer spending and an increase in export revenues, both of which helped to offset lower levels of government spending and business inventory building.  When compared with the previous year, the United States economy grew by 2.6% over the first six months of this year, putting it a little behind the 3.0% GDP growth rate that we have predicted for the US this year. 

Looking ahead to the second half of this year, the United States economy is expected to record growth rates slightly higher than those recorded in the first half of this year.  On the positive side, consumer spending is forecast to continue to strengthen in the coming months, as are business investment levels and these factors will propel growth rates slightly upwards in the coming months.  However, economic growth will not grow much faster as government spending is likely to remain subdued, while export demand will be hindered by the strength of the US dollar and the continued weakness of many key export markets.  Moreover, the continued fall of oil prices will result in lower investment levels in the US’ shale gas industry, weakening what had been a key pillar of growth for the US economy in recent years.  In addition, the US Federal Reserve is increasingly likely to raise interest rates in the latter part of this year and this too could dampen growth prospects over the near future. 

When looking at the big picture, it is increasingly likely that the United States economy in the midst of a decline in its economic growth ceiling to a level that may be closer to 2.5%-3.0%, rather than the 3.5%-4.0% levels that were in place as late as the 1990s.  If this is the case, economic growth rates in the US may no longer be capable of reaching the levels of the 1990s or earlier as demographic growth slows and as export demand remains subdued.  In fact, without major increases in productivity in the US, there is nothing to suggest that the economic growth ceiling in the United States will rise again in the coming years.  With the economic growth ceilings of Europe and Japan at even lower levels, and with China’s growth ceiling falling rapidly, this is yet another signal that global economic growth rates are also likely to remain subdued for the foreseeable future.