RaboResearch - Economic Research

United States: political outlook improved while economy looks on track

Country Report


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The US economy is in good shape as growth remains robust and unemployment at pre-crisis levels. Politics has become more stable and bipartisan lately, with the advent of Paul Ryan as new Speaker of the House. The conclusion of TPP, when ratified, will add to the US’ geopolitical clout.

Strengths (+) and weaknesses (-)

(+) Large and diversified economy

The US has the largest economy in the world (in nominal terms, second after China in PPP), with steady GDP growth, and a high level of economic diversification.

(+) Self-sustainable in energy and food

With the current energy production, thanks to shale gas development, and the highly developed agricultural sector, the US is self-sufficient in the production of energy and (many) foods.

(+) Reserve currency of the world

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

(-) Partisan political scene

Democrats and Republicans find it difficult to compromise on legislation, which hurts the effectiveness of the Federal government.

Key developments

1. Successful rebalancing and favourable oil prices support growth

Growth prospects for the US economy remain favourable. The year 2015 boasted a growth of 2.5% y-o-y which is expected to remain steady at 2.4% in 2016 (figure 1). Growth will be driven primarily by consumption which receives a boost from the low oil prices and the good state of the labour market. Lower oil prices have already added around 1 percent of GDP to households’ purchasing power since mid-2014. Though this has been largely saved in an effort to deleverage, it leaves consumers in a better position to spend over the course of the coming months. Steady employment growth has pushed some indicators to pre-crisis norms. Unemployment currently stands at 5.0% but we signal that significant underemployment remains (figure 2). On the other hand, we see that pay growth has finally started to increase, a sign that the recovery of the labour market is picking up speed. Low inflation is also supportive of consumption.

Figure 1: GDP growth in components
Figure 1: GDP growth in componentsSource: EIU
Figure 2: Low employment but still some slack
Figure 2: Low employment but still some slackSource: Macrobond

Although oil related investment will take a hit as the low oil prices are pushing some of the high costs producers (i.e. shale oil) out of business, overall business investment is expected to hold up well. The low output gap raises capacity utilization and may induce investment although the continuing strengthening of the dollar may weigh on export oriented business investment.  

In December the Fed went ahead with its long expected rate hike and raised its policy rate by 25 basis points as a first step towards normalisation of monetary policy (figure 4). This is a good sign, considering the low output gap and low and declining unemployment. When it raises rates too quickly however, the FED  risks reducing growth which may push rates back to zero within the end of the year. In particular a further strengthening of the dollar would hurt exports and stimulate imports, reducing growth. This strength is therefore acts as a constraint on monetary policy.

2. New House Speaker will improve political stability

The political situation has improved somewhat. In the second half of the year, House republicans ousted their Speaker Boehner, who was responsible for the last government shutdown. In view of political stability, it is fortunate the House has chosen the seasoned Paul Ryan as new Speaker. After being chosen, he has already proved himself by delivering a tax and spending bill which boasted overwhelming support of Democrats, possibly signalling a new era of bipartisanship. He has also tried to give the Freedom Caucus, the deeply conservative faction within the party, more skin in the game in an effort to keep the party together. That said, policy making may become a little more confrontational in the advent of the 2016 presidential elections. A good example is the row over planned parenthood which was sparked by Republican presidential candidates. Congress almost abandoned all federal funding for an agency that supports women’s health after it was reported that the agency performed abortions with funds from private donations. Experts assert that once the candidates go into full campaign mode at the start of 2016, legislative activity in Washington could quickly taper off and freeze until November 2016.

3. Transpacific Partnership big step in pivot to Asia

In October 2015, the Obama administration has secured an important geopolitical achievement with the signing of the Transpacific Partnership (TPP). This free trade agreement (FTA) covering 12 countries that make up around 40% of world GDP, is a major step in the US’ strategic rebalancing away from Europe and the Middle-East towards Asia. It can be seen a reaction to a growing assertiveness in China’s foreign policy in the region, exemplified by the recent stand-off over territorial claims in the South Chinese Sea. TPP will intensify trade between the US, Japan and a number of pacific countries including Vietnam, Malaysia and Australia. It will also serve as an update to the 1994 NAFTA agreement as Mexico and Canada also participate. Although the agreement faces a vocal opposition, it is still expected the US (and other countries) will ratify this treaty, especially since the new Senate Speaker Paul Ryan is pro-trade and the bill cannot be amended by Congress. The main risk is that Hillary Clinton or Bernie Sanders, both democratic nominees, may kill the agreement should they be elected as both positioned themselves against it.

Factsheet of United States
Factsheet of USSource: 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 in nominal terms. 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 resulting checks and balances ensure accountability and protect against the tyranny of the majority, but make it difficult to implement far-reaching reforms. 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 achieve significant economic growth.

In the international arena, the US has lacked a natural ideological opponent, since the Soviet Union collapsed in the late 1980s. 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 USSource: EIU

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