During 2012 the US is undergoing a period of severe economic stress during a presidential election year. Research has shown that economic growth in the second half of an election year is meagre at best, and when this is combined with a political impasse in Congress the potential for measures to encourage economic growth seems limited at best. In spite of this the US economy managed to grow at the rate of 2% in Q112; slowing thereafter but still growing at the rate of 1.5% in Q212 as consumer spending eased.
At a time when many major European economies such as the UK and Spain are shrinking in terms of gross domestic product (GDP), growth of any kind in the US is welcome. Furthermore, in the first half of July 2012 US figures for ‘first time’ unemployment saw claims drop to their lowest level since 2008. However, this is against the backdrop of a plateauing in the unemployment total, which shows that the US economy is not yet out of the woods.
The business sector, especially manufacturing and services, has not performed that impressively in recent months. Technology firms such as Apple, Amazon, Microsoft and Facebook, which had previously been performing well, experienced a difficult quarter and expect only a slow recovery. Similarly, banks that performed well in the recent past such as JP Morgan and HSBC, have struggled with crises that include the huge ‘London whale’ trading losses for JP Morgan and fines related to money laundering activities for HSBC.
While both these banks have still managed to post good results in spite of these crises, the overall outlook for the sector is uncertain. There appears to be a systemic tendency for such shortcomings and it is unclear whether the banks have learnt their lesson from the global financial crisis. A reflection of this has been the call by Sandy Weill, former chief executive officer (CEO) of Citigroup, to reinstate the separation between investment banking and retail banking. This is quite a drastic recommendation, considering Weill was among the main proponents for repealing the Glass-Steagall Act, which in the 1930s created a barrier to co-ownership of investment and retail banks after the Great Crash of 1929. Glass-Steagall’s repeal in 1999 has been blamed for creating the circumstances that led to the 2007-08 financial crisis and Weill’s subsequent conversion indicates that the wheel has turned full circle.
Reforms and Regulation
One important recent development is the reform of healthcare, which broadly seeks to provide coverage to all Americans regardless of their income level. The Supreme Court decided in favour of the stance taken on healthcare by President Obama and upheld a core requirement, known as the ‘individual mandate’, that Americans buy insurance or pay a fine. While it is a measure commendable in its intent, it will cost the economy trillions of dollars to be able to meet the shortfall in healthcare investment. This will come either from the government and taxpayers, or employers. Hence, from an economic point of view, healthcare reforms could lead to large-scale changes in the economy at a crucial and sensitive juncture.
In the capital markets, a widespread impact is expected from regulations such as the Dodd-Frank Act. The general impression has been that banks are trying to lobby the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), the two rule-making bodies, to water down the final rules for various sections of the Act. However, investment banks have also started reforming their organisations and trading practices in line with the Act’s requirements well before the required date of implementation.
One example is the curbing of proprietary trading. Banks have either shut down their prop-trading desks or shipped them out to hedge funds. But the situation is different when it comes to corporates. Firms such as energy majors that engage in significant trading of energy derivatives appear to be slightly confused by the vast number of rules being created and require some time to make preparations for meeting the Act’s requirements. Similarly, the new Basel III capital adequacy regulations will also have far-reaching impact. While they are less relevant to the US market in the short-term than they are for Europe, over time the Basel III reforms are seen as being likely to result in a more conservative trading environment with banks having to become more efficient, particularly in their use of collateral across different parts of the organisation.
Weather, Immigration and Outsourcing
In a normal year weather and agriculture would not be a major part of any discussion on the US economy, but 2012 is an exception. A major drought threatens the country, with the corn belt facing the brunt of unusually hot weather. This will lead to a rise in food prices and the overall rate of inflation. Companies have already started preparing for the shortfall and are beginning to increase their imports of corn from countries such as Brazil. Higher food prices will also lead to unrest among consumers and voters, who are already under pressure from the economic crisis. This could influence the election outcome, along with the unemployment figures.
One area which is especially affected by both the economic slowdown and election year strategies is the immigration policy for highly skilled workers. For example, working visa requirements were recently toughened for foreign workers and fewer work visas are being provided to foreign graduates in the field of science and technology who have studied at US universities. While the reasoning for this is that it allows more jobs to be available for local talent, it also means that some long-term growth potential of the economy is sacrificed for short-term gain. It is generally recognised that highly trained workers also help generate employment and growth. By reducing the intake of foreign skilled workers, the US could fall behind its competitors for such talent, such as Canada, Australia, the UK and Germany, as well as Asian education powerhouses such as China, Japan, India and Korea.
Some believe that the recent political emphasis on reducing US reliance on outsourcing to countries such as China and India could also have a similar impact. Many American corporates have benefitted from outsourcing their manufacturing to southeast Asian countries, particularly China, and IT maintenance and development to countries such as India. If the attempt to reduce outsourcing and increase ‘in-sourcing’ is anything to go by, then some jobs will be brought back to North America but it will reduce the efficiency of US firms. Again, over time, their competitiveness will reduce in the global business environment, with long-term viability being threatened by short-term gain. Hence, this is a sensitive issue in which the US will have to achieve an equilibrium that is ideal over the long-term and keeps in mind the fact that by antagonising its Asian counterparts, the US could lose competitive access to what are currently some of the fastest growing markets in the world.
So there are a number of issues of concern in the US markets and economy. It is a highly dynamic environment, where economic and non-economic forces are shaping the nature of the recovery from the financial crisis and its aftermath. While the strong on-going debate regarding the steps needed to strengthen the recovery is welcome, what is slightly worrying for a neutral observer is the current tendency of the US economy and policy to turn inward.
The US has been an engine of growth for the global economy for many years. The short-term effects of the financial crisis and the ensuing impact on unemployment and expenditure should not lead to a protectionist stance as it could be self-defeating, and it is also undesirable for the global economy at large. Despite its problems, the US remains a very important part of the global economic jigsaw and is a much better candidate for powering any recovery than Europe and possibly even Asia, considering the export demand dependence of many Asian economies on the US.
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