American Independence Day celebrated

american independence dayIt’s an old piece of economic wisdom that when America sneezes, the rest of the world catches a cold.

Most of us have been preoccupied by the prospect of Brexit, the fallout from the election and the economic outlook on this side of the Atlantic. We may have missed the news that America could be showing signs of a chill.

The American economy turned in its weakest performance in the last three years during the first quarter of 2017. With the 4th July being American Independence Day, it’s interesting to see the reasons why – and why we might not need to reach for the hankies just yet.

Is the American consumer losing confidence?

The US Bureau of Economic Analysis reported that US gross domestic product, the total output of goods and services produced, grew at an annualised rate of just 0.7% in the first quarter of 2017. This followed a followed an expansion rate of 2.1%  in the last quarter of 2016, and the worst performance since the first quarter of 2014 when the economy contracted by1.2%.

Analysts had confidently been predicting a 1.2% expansion. The Q1 GDP slowdown reflected slower consumer spending, which grew at just 0.3%. It looked as though consumers were sharply slowing their spending, usually a sign of worries about the future.

However, economists warned against reading too much into the data. There may be some other factors in play.

Why the figures may be misleading

There are a number of reasons why the figures are not as worrying as they might be. Some are trivial – the unusually warm winter, for example, has meant less spending on gas and electricity bills. This is of course good news for consumers, but has a meant a real reduction in outgoings, and on the figures the analysts have to work with.

But there are more significant trends currently affecting consumer confidence. The employment market is changing, partly as a consequence of the way the economic recovery is happening, and partly as a result of technology.  Unemployment is set to continue to fall, although it has to be noted that many more workers are part-time and would prefer full-time work.

But the new employment landscape may actually be an attractive one. Most job growth is currently in low-paying retail and food service industries. Robotics, technology and of course the internet have meant that many traditional roles are becoming harder to come by. But for the longer term, the prospects of continued recovery,  and increasing demand for highly skilled people are felt to be significant.

The Bureau of Labor Statistics suggests that the biggest growth (5.7 million jobs) will occur in healthcare and other forms of social assistance as the American population ages. They also predict that jobs requiring a master’s degree will grow the fastest, as technology increases the demand for computer systems design, especially mobile technologies, and management, scientific, and technical consulting.

At the other end of the spectrum, increased domestic manufacturing activity promised under the new administration’s ‘America First’ programme may improve blue collar employment prospects. As housing recovers, construction will add 1.8 million jobs.

It seems that the first quarter figures may just be a blip.

The longer term outlook

Many analysts have noted that there is now an established pattern of GDP growth disappointing in the first quarter and rallying over the remaining three quarters. Since 2010, the average for first quarter growth is only 0.9%, compared with 2.4% in each of the other three quarters.

The US central bank, the Federal Reserve, has already signalled that it does not place much significance on quarterly GDP figures. They have already raised overnight interest rates by 0.25% in March. They suggest that the current data is unlikely to dissuade them from further interest rate hikes this year.

It seems that in America there may have been a pause for breath, but the climb out of recession is set to continue.

Why this might be good news for the UK

Just as bad economic news in the US can be the foretaste of trouble for the rest of the word, the converse can be true. The US may be pointing the way forward for the developed nations, with an increased focus on skilled employment.

It is a focus the UK can emulate, with a thriving technology sector. Employment in the UK is already close to record levels, and demand for skills increasing.

Of course, the UK is not the US, and we face very different challenges, not least the Brexit negotiations. But with the US recovering, we may have another thriving trading partner, whatever happens to our ties with Europe.

What should you do?

If the UK is to follow the US lead, we might expect continued growth, low unemployment and interest rates that will rise.

Of course, economic forecasting is never dependable, so the best thing approach is to stay focused on your own financial well being. Reducing debt, building up your savings, and increasing your wealth remain key objectives for most of us.

If you would like some professional advice on achieving your financial goals, please call the Continuum team.

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