The US economy has been performing well lately, growing at a healthy rate of 2-3% annually. But will this strength last? It is likely that growth will slow down gradually over time to a more sustainable pace, but that is not bad news, it is good news. Inflation (the rate at which prices rise) will slowly move closer to 2% too. Since inflation isn’t expected to drop quickly, the Federal Reserve (the US central bank, also called “the Fed”) might not reduce interest rates this year.
But economic predictions are tricky, nobody can predict the future perfectly. That’s why analysts watch many different indicators to see if their expectations need adjusting.
One tool analysts use to track the economy is the Citi US Economic Surprise Index. This measures whether recent economic data (like job growth, spending, and production) has been better or worse than expected. Recently, this index started dropping, which could mean the economy’s momentum is slowing. But this index can be “noisy” (it fluctuates a lot), so more data is needed to confirm any real trend.
Higher interest rates, set by the Federal Reserve to control inflation, are making borrowing money more expensive. This has hurt sectors like housing and construction, which depend heavily on loans.
The number of new homes being built has been steadily decreasing for months. Investment in commercial buildings (like offices and shopping centres) is also slowing. Applications for new mortgages (loans to buy homes) have dropped sharply.
This slowdown in housing isn’t new, though. It’s been happening for a while because high interest rates make it harder for people and businesses to afford loans. What’s surprising, however, is how well the rest of the economy has held up despite these challenges. People are still spending money, and businesses are still investing, just not as much in housing.
Another way analysts track the economy is through surveys of purchasing managers, people who buy materials and supplies for businesses. These surveys show how different parts of the economy, like manufacturing and services, are performing.
In manufacturing (factories), the surveys tell us the sector is still struggling, but there’s been a slight improvement recently. In services (like restaurants and tech support): these sectors are growing, but at a slower pace. So far, there hasn’t been a clear trend showing the economy is getting much weaker.
Outside the US, many major economies like China, the Eurozone, and emerging markets are slowing down. This might sound concerning, but it doesn’t necessarily spell trouble for the US economy. Unless slower global growth leads to big problems like unsustainable debt or rising unemployment it’s not likely to stop the current US expansion.
Jobs are a key part of economic health. Recently, some indicators suggest that the labour market might be cooling down slightly. Continuing jobless claims measures how many people are staying unemployed for an extended period. claims rose during the autumn but have started to decline again in December. The unemployment rate is still low, but it’s slowly creeping up. Businesses are hiring fewer people than before, but they haven’t stopped hiring altogether. None of these trends are alarming at all and continue to indicate business as usual.
Small businesses are often called the backbone of the economy because they employ so many people. Recent surveys show some positive signs. Small business owners are feeling more optimistic, with confidence hitting its highest level since 2021. Morgan Stanley’s Business Conditions Monitor, which tracks how businesses are doing across different industries, also hit a two-year high. For now, it seems like small businesses are doing okay, which is a good sign for the broader economy.
The economy rarely gives a clear, simple message, it’s a mix of signals, some positive and some negative. So where do we stand?
The US economy is still growing, but there are signs of slower momentum in certain areas, like housing and jobs. Key indicators, like purchasing manager surveys and small business confidence, don’t show major trouble yet. Slower growth in other parts of the world isn’t a big threat to the US economy right now. Overall, while there are some clouds on the horizon, the broader economic picture hasn’t changed much. It’s something to keep an eye on, but there’s no need to panic.
It’s worth remembering that many experts predicted doom and gloom for the US economy in both 2023 and 2024. Concerns about inflation, high interest rates, and global instability led to widespread forecasts of a downturn, but those predictions were largely wrong. The US economy proved resilient, driven by robust consumer spending, innovation, and a flexible labour market. Betting against America has historically been a losing strategy, and with its unmatched ability to adapt and grow, it remains a strong foundation in an unpredictable world.
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