The Independent Market Observer

The U.S. Economy: 5 Key Stories

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jan 29, 2015 2:43:00 PM

and tagged In the News

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U.S. economyBetween oil prices, the Greek election, and everything else, quite a bit has happened around the world over the past several weeks. Let’s take a look at five recent events and what they might mean for the U.S. economy.

1. The Greek election

Are we in for a rerun of 2011? Although many expected the new Greek government to talk tough throughout the campaign, then compromise, the reality so far is exactly the opposite. Greece has already started reversing some of the agreed-upon austerity measures and has directly challenged the EU, almost daring it to eject Greece from the euro.

This could get very bad for Europe and for Greece.

2. The oil price decline

The economic news that may mean more than anything else lately is the drop in oil prices. A 50-percent decline signals one of two things: a new financial crisis, as in 2009 (the last time this happened), or a major stimulus for the whole world. I would argue that the 2009 price decline was driven by a decline in demand from the crisis, while the current drop is largely supply driven, with the U.S. as the new price setter.

With oil prices so low, the U.S. is already benefiting in the form of cheaper gas. Other areas of the world, which import more oil than we do, are poised to benefit even more.

3. Ongoing U.S. growth

With the highest growth rates in years over the past two quarters—and the highest rate of job creation since 1999—the U.S. economic recovery is solid and accelerating. Although wage growth is lagging by some measures, aggregate wage income is still on the rise. Combined with the drop in oil prices, this means we should see even more growth in the U.S. economy in 2015, despite weakness elsewhere in the world.

4. The strong dollar (and currency wars abroad)

Both are driven by the same thing: the strong U.S. recovery and continued weakness around the world. As both Japan and Europe pursue monetary policies driven by economic frailty (and cause their currencies to decline in value), we can expect this state of affairs to continue. Although it will hurt U.S. companies that sell overseas, it will benefit consumers, as well as companies that manufacture abroad and sell here.

Overall, the dollar is being powered by the strength of the U.S. economy more than any other factor, and that’s a good thing.

5. Stock market volatility

After hitting another record in December, the market has pulled back a bit and may continue to do so. With valuations high and earnings heading downward (as a result of factors 2 and 4 above), some adjustment isn’t just possible, it’s appropriate and expected, even as the bigger picture remains healthy.

Short-term volatility is quite possible, but the economic fundamentals remain strong.

Nothing but good news for the U.S.

When you put all the pieces together, the net result should spell continued economic health for the U.S. The real issues right now are all elsewhere in the world. Although we certainly might get hit by a Greek exit from the euro, for example, the overall effect might turn out to be positive for the U.S., despite the shorter-term turbulence.

Barring any significant changes, things still look good here.

                                     

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