RaboResearch - Economic Research

Country Report United States

Country Report

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The US remains the largest economy in the World, on the back of its  highly developed and flexible framework. Bi-partisan politics have rendered the federal government ineffective, but at least the most pressing economic uncertainties have been lifted.

Strengths (+) and weaknesses (-)

(+) Large and diversified economy

The US has the largest and most diversified economy in the world, that is highly productive and efficient based on a well-educated workforce

(+) Self-sustainable in energy and food

With the development of shale gas fields, the current energy production and the highly developed agricultural sector, the US will be self-sustainable

(+) Reserve currency of the world

The US dollar is the world’s reserve currency and will retain that status for years to come.

 (-) Partisan political scene

Increasingly, Democrats and Republicans are encountering difficulties in reaching across the aisle, endangering the effectiveness of government in reducing high fiscal deficits and government debt levels.

Key developments

1. Agreement reached on budget, debt to follow

In the latter stages of 2013, the government and Congress (House of Representatives and the Senate) finally reached an agreement on the federal budget, after a government shutdown that lasted from 1 October until 16 October. After an initial deal was reached, representatives from both parties finally struck a budget deal in December, that has averted the shutdown-risk until at least October 2015. Another problem still remains, as the debt ceiling will need to be raised in February. However, as the budget has been passed, we do not expect any insurmountable issues to arise on this front. The latest developments mean that the US government has entered calmer waters concerning fiscal policy, which bodes well for the short-term outlook of the economy. Nevertheless, given the high indebtedness of the country, in combination with a still large fiscal deficit, structural improvements on both revenue and expenditure side will be warranted in the coming years as the country emerges from the Great Recession.

2. Monetary policy also providing more clarity

New Federal Reserve president Janet Yellen (as of February 2014) has inherited a Central Bank already on course to slowly reduce its third quantitative easing programme (QE3). In January, the second USD 10bn reduction of the USD 85bn programme was announced. Current expectations are that the QE3 will have been completely built off by the end of this year. Furthermore, the Fed also announced that the interest rate will remain at its current all-time low level, and there are expectations that a first increase will not happen until late-2015. Both is good news for the US growth outlook. First of all, it provides some clarity as to the future of the QE programme. Second, it provides debtors with a clear indication of their interest payments in the foreseeable future. On the downside, as the economy is picking up on the basis of domestic consumption (more on that below), there is a risk of a credit bubble being created, that could wreak havoc when interest rates are increased. 

Figure 1: Policy rates
Figure 1: Policy ratesSource: Reuters, Ecowin
Figure 2: Current account
Figure 2: Current accountSource: EIU

3. Growth gained momentum in 2H2013

2013 started the way 2012 finished, with plenty of bi-partisan politics, indecision on a federal level, and uncertainty surrounding budgetary and debt issues. No wonder, in that respect, that growth disappointed in the first half of 2013. However, the US economy has picked up steam in the second half of the year. Faced with the balance sheet recession, as the financial crisis of 2008 turned out to be, the US has been quicker than other western economies to rebalance its domestic economy. Household debt pressure has decreased vastly, as has the leverage in the financial sector. On top of that, and in spite of the significant drop in the house prices, the house prices are moving up since bottoming out in 13Q2 (figure 3). Also, unemployment is on its way down, as is shown in figure 4. These events give the US consumer cause for some optimism, and consumption is again gaining traction, resulting in an uptick for the US economy. All this may lead to US growth increasing from a level below 2% to 2.5-3% in 2014.

Figure 3: Real house prices
Figure 3: Real house pricesSource: Dallas Federal Reserve
Figure 4: Unemployment
Figure 4: UnemploymentSource: Bureau of Labor Statistics

 

Factsheet of United States
Factsheet of United StatesSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

The United States of America (US) is the World’s largest economy. It is a relatively young country that gained independence from Great Britain in the 18th century, when the country became a republic with its leaders chosen by the population. Much of the political system that was implemented at the time, still exists, with a clear line of separation between the powers of the trias politica, and between the powers of the federation and the states proper.

The US  has a highly diversified economy, with an abundance in natural resources (especially now that shale gas is being exploited), a highly developed industrial base and a very deep capital market. The flexibility of the economy was once again on display in the aftermath of the global financial crisis of 2008. The US was the first of the western economies that was able to turn the corner and obtain significant economic growth. In the international arena, the US is still finding its place in this new world beyond the Cold War. Since the Soviet Union collapsed in the late 1980s, the country has lacked a natural ideological opponent. In the past decade, both Islamic terrorism and the increasing influence of China have been challenging US supremacy. While the War on Terror has been fought in Iraq and Afghanistan, it seems that the US’ appetite to interfere in the Middle East is waning. The development of the shale gas fields is very important in this aspect. Therefore, attention is increasingly focused on China, as the countries have (in)direct conflicts on cybercrime and influence in Southeast Asia.

Economic indicators of United States
Economic indicators of United StatesSource: EIU

Remarks: The government debt and deficit figures in this table only include the central government. 

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Author(s)
Jeroen van IJzerloo
Rabobank KEO

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