Fin paper revised

ANALYSI

U.S. Economic Analysis

For 2015,2016 and 2017

ECONOMIC ANALYSIS

2015

In 2015, the U.S. economy had expected to achieve moderate expansion, which would show relative strength in the global economy. Compared with 2014, the real GDP in 2015 experienced a 2.4 percent moderate increase. To be more specific, the U.S. economy started off the year with weak growth, followed by a slow increase in Q2 and Q3. The growth rate of first quarter was 0.6%, which was affected by factors such as harsh weather and export negative growth due to labor disputes in the west coast. [footnoteRef:1] [1: http://www.ibtimes.com/economic-growth-slows-sharply-q1-2015-5-factors-slowing-us-gdp-1901257 ]

Personal consumption expenditure strongly contributed to the growth of Real GDP, which decelerated to 3.6 percent on average in 2015 from 4.4 percent in 2014[footnoteRef:2]. After the crash of oil price in the end quarter of 2014, the consumer spending revealed a general trend of fast increase, from 2.7 to 3.1. Consumers should take time to believe they have extra money, so personal saving rate was shooting up in 2015. (figure 1) [2: https://www.bea.gov/newsreleases/regional/pce/2016/pce1016.htm ]

According to the 2015 real GDP structure analysis(figure1), it was indicated that customer spending was not primarily vulnerable. The most vital component was fixed assets, especially the nonresidential investment. The growth of nonresidential investment is a primary sign of expanding reproduction by existing enterprises. However, the Q4 was developing in the negative trend, which was the first negative tendency since the second quarter of 2011[footnoteRef:3]. In the energy sector, the price decline of crude oil leading to the shrinking of investment in nonresidential (split up into oil and mining sector and non-oil investment spending) was an important reason. The crude oil companies had to decommission half of their entire rigs and reduce investment in exploration and production during a downturn of the oil industry.[footnoteRef:4] Despite the fact of the stunning fall in oil price could reduce energy cost and contribute dramatically to metal and food field and increase consumer disposable income, it also a significant sign for declining global economic growth. Sharp decrease in investment in energy commodity led to slow the economic growth. Meanwhile, it contributed to the financial markets volatility in 2015. For oil companies and oil exporters, they faced a depressing financing environment. For those countries dependent on oil export, it was difficult to achieve economic diversification in order to stabilize the fluctuation of oil price. It was useless if those countries just depended on exchange rate flexibility and a substantial number of currency reserve for avoiding financial crises during lone-term period. [footnoteRef:5] [3: http://www.economicpopulist.org/content/advance-estimate-2nd-quarter-gdp-revisions-2014-present-6116 ] [4: http://www.ibtimes.com/economic-growth-slows-sharply-q1-2015-5-factors-slowing-us-gdp-1901257 ] [5: https://www.weforum.org/agenda/2016/03/what-s-behind-the-drop-in-oil-prices/ ]

As for the export and import, the significant slump completely attracted our attention, which dropped from 5.4 percent in Q4, 2014 to -6.0 percent in Q1 2015. Although the west coast labor disputes had a bigger influence on export than import, leading to negative growth in export commodities immediately, the deceleration growth of emerging market and strong dollar were the root cause. Those two internal reasons had more significant impact on the domestic economic growth than expected. With the improving trade balance and budget deficit, a smaller trade gap and a shrinking deficit were resulting in the strong dollar. [footnoteRef:6] [6: http://www.businessinsider.com/why-the-dollar-is-strong-2015-1 ]

The Federal Reserve raised short-term interest rates by 0.25% for the third consecutive quarter in nearly a decade, which was the signaling confidence for the U.S. economy. The primary role of Fed was maximizing employment rate and stability inflation rate. We can see from the chart below, unemployment rate experienced an upward tendency from 10% in 2009 to 5% in 2015. Fed made a prediction that the unemployment rate would remain stable in 5% in the last two years after rising interest rates. As we all know, Fed increasing the interest rate aimed to the expectation for the inflation rate in 2016. Personal consumption expenditure was to take off in 2015, which meant higher inflation resulting in stronger buyer power and real disposable personal income increasing. [footnoteRef:7] [7: https://www.nytimes.com/interactive/2015/09/12/business/economy/fed-rates-explainer.html ]

In terms of the financial market, stock headed for a flat to down finish during 2015 generally. There were four reasons leading to dogged stocks in 2015, including decreasing in commodity price, lower oil price, weak economic growth, strong dollar and a currency devaluation in China. In addition, compared with the peak of 2016 about 65% of the stocks in Russell 3000 index slumped 15%, which is an indication of unsatisfied performance of stock market in 2015. Another significant index is S&P 500 which dropped 6% compared with high. To be more specific, the consumer discretionary stock, which was the best sector performer in 2015, rose 7.4% in 2015. Due to the plunging oil prices, energy sector decreased 25%. [footnoteRef:8] As for bond market, the most essential issue was declining oil price affecting high yield market in direct and indirect way. Barclays U.S. corporate high yield index yield to worst up from approximate 5% to above 10%. All companies involved in the energy sector which was represented 16 percent of the high yield market in 2015 had been less profitable than previous years. [footnoteRef:9]In a recent Wall Street journal article, It said 2015 will represent a record year for corporate bond, with over $1 trillion issued in the first three quarter. There are 33945 distinct CUSIPs traded in first three quarter in 2015, which is relatively high compared with previous years.[footnoteRef:10] [8: https://www.nytimes.com/interactive/2015/09/12/business/economy/fed-rates-explainer.html ] [9: http://www.aegoninvestments.com/Images/AUIM%20High%20Yield%20Market%20Update%20-%20Impact%20of%20Oil%20Prices_tcm79-58039.pdf] [10: https://www.finra.org/sites/default/files/OCE_researchnote_liquidity_2015_12.pdf]

2016

Compared to last year The U.S. economy of 2016 grew 1.6%, down from 2.6% and the modest 2.1% average throughout the 7.5 years recovery[footnoteRef:11]. In 2016, the personal consumption was represented 60 percent of the U.S. GDP, business investment was accounts for 16% and government spending is 18% and -3% of net exports. [11: https://www.usatoday.com/story/money/2017/01/27/economy-slowed-q4-growing-19/97106924/.]

The weakest season is the first quarter, with only 0.5% growth[footnoteRef:12]. The slight growth revealed that the economy was still slow by lacking of confidence for U.S. economic environment. However, the employment rate and the stock market had recovered from financial crisis. Most analysts realized that the United States economy was confronted with the risk of recession. But, in the same time. The wages were beginning to rise because of the low price of the oil and gas, which increased 2.3 percent compared with last year. Meanwhile, the slightly weak dollor had a positive influence on profit gain for most export companies. The Federal Reserve had given an opnion of a mixed review of U.S. economy, which is the U.S. economic activity was slow down in 2016 in spite of the labor market improvement . As for the personal consumption, there are almost 70% of consumer spending, the total is $12.82 trillion. [12: https://www.washingtonpost.com/news/wonk/wp/2016/04/28/u-s-to-release-data-showing-gdp-growth-for-first-quarter/?utm_term=.16cd8bf1b782. ]

As for the Gross Domestic Product (GDP), there is an upward tendency in the second quarter of 2016 from 0.8 to 1.4, which is primarily caused by the an significant growth in personal consumption expenditures (PCE). This was largest rising trend in PCE compared with previous five year, from 1.6 to 4.3.The root cause of the boost was consumer spend more on durable goods, such as cars and furniture, which results in growth in fuel sales. Exports achieved positive growth, which is caused by private inventory investment, residential fixed investment, state and local government spending and nonresidential fixed investment[footnoteRef:13]. The president campaign debate was about to begin, so the market is looking forward about their speech. Meanwhile, consumer spending was supported by powerful labour market. [13: https://www.bea.gov/newsreleases/national/gdp/2016/pdf/gdp2q16_2nd.pdf.]

Figure 3. the overall GDP growth of every quarter from 2014 to 20161.

Consumer spending experienced a dramatical increasing, which makes up more than 2/3 of U.S. economy activities. With consumption increasing, imports were updated to show that it rose to 0.3 % , which was compared with the declining 0.4. There was a relatively downward revision to export growth as well. Real Gross Domestic Product (GDP) experienced a increase from annual rate of 1.4 to 3.5 in the third quarter of 2016.[footnoteRef:14] Growth was lifted by upward revisions to business investment in structures and home building. For the forth quarter, the number from housing retail sales and manufacturing showed that the economy kept stable. [14: https://www.bea.gov/newsreleases/national/gdp/2016/pdf/gdp3q16_3rd.pdf. ]

Real gross domestic product (GDP) increased at an annual rate of 1.9 percent in the fourth quarter of 2016[footnoteRef:15]. The biggest parameter contributing to the downturn was the gaping in the trade deflicit. The large number of selling soybeans to Latin America caused the increasing of expot. Meanwhile, the import also increased. Government spending was $3.27 trillion , which comstituted 18 percent of total GDP. There is 19 percent difference compared it contributed in 2006. [15: https://www.thebalance.com/components-of-gdp-explanation-formula-and-chart-3306015]

In term of monetary policy, in order to support further improvement in labor market conditions and a return to 2% inflation, the monetary policy remained accommodative in Q1 and Q2. The monetary policy remained the same in Q3 and Q4 because of the active economy expended at the moderate pace and stronger labor market.

The financial markets in 2016 has been through a lot of noises. The historic referendum is that the United Kingdom voted to leave the European Union, and the Prime Minister David Cameron announced his resignation. This leave the market in a big surprise and talking about the how the UK leaves the EU and it will be a long meeting. At the August peak of the global bond market, total negative yielding debt amounted to $13.4trn. Of course, another news which affect the stock and bond market is that Donald trump beats Hillary Clinton for the presidency, winning the Electoral College with 306 pledge electors, which leads the market going down quickly, but after one day, the market goes up. Although Trump said he will not continue the Obama healthcare and build the wall between US Mexico, but everyone knew is it not an easy job and if he did so, he should have another plan to address the immigration and healthcare issues. The S&P fell 12.9% in 14 days: the worst ever start to a year and hard to forget[footnoteRef:16]. [16: http://www.businessinsider.com/a-look-at-financial-markets-in-2016-and-2017-2017-1]

Overall, there are a lot of uncertain factors in 2016. There are large up and down in every quarter as term of GDP growth, this indicates that the economy is not stable overall. The Federal Reserve should very carefully use policy tools to maintain the finical market stably expansion in 2017.

2017

After the low growth in 2016, the economy in 2017 has improved tremendously. During the first quarter with President Trump’s presidency, economic growth hit 3%, according to revised estimates released by the government[footnoteRef:17]. Stocks were also sky high the day after his election. That's the strongest growth since the first quarter of 2015. This improvement is because of the increase of consumer activities such as their spendings, with purchases of durable things like cars and appliances rising quickly[footnoteRef:18]. The increased business also helped drive the previous estimate above Commerce Department’s initial prediction of 2.6 percent in this quarter. The government’s data estimates that all purchases have decreased, whatever where it purchase from, which also explains why outlets and small stores may be suffering although consumers are more bullish and the broader economy powers ahead[footnoteRef:19]. [17: http://money.cnn.com/2017/08/30/news/economy/gdp-second-quarter-economy-3-percent/index.html.] [18: https://www.nytimes.com/2017/08/30/business/economy/gdp.html] [19: https://www.nytimes.com/interactive/2017/08/04/business/economy/the-economy-under-president-trump.html.]

In the beginning of 2017, the GDP growth rate is predicted to be 2.4 percent overall which took into account the impact of Trump’s policy. The GDP of the first quarter increased by 1.4 percent rate, but from a historical percspetcive, it is still the lowest. This mainly arises because of national problems with the calculation of the data from government, which said the government is working to solve the problem. Exports were renewed to 7.0 percent rate from its previous 5.8 percent in the first quarter [footnoteRef:20]. Business spending on instruments has been updated to 7.8 percent rate during the first quarter period rather than what was previously estimated which was at 7.2 percent. [20: https://www.cnbc.com/2017/06/29/final-reading-on-q1-gross-domestic-product.html.]

The real gross domestic product (GDP) increased at the annual rate of 3.1 percent in the second quarter of 2017. This was mainly because consumers had experienced a growth after the poor first quarter with increase in spending. After the changes, the real gross domestic income (GDI) increased 2.9 percent in the second quarter, compared with an increase of 2.7 percent in the first[footnoteRef:21]. This came in a little larger than markets’ expectations of a smaller increasing to 2.8% and marked a solid upward from the first quarter’ 1.2% increase. This was mainly due to the recovery of the economy along with presidency. The year-on-year expansion was confirmed at 2.1 percent rate in second quarter, which is above the 2.0% increase seen in the first quarter. There is an increase of household and income, job increasing and the use of credit. Business spending also improved, with a strong increasing in laptop purchases, although low oil price is threatening investments in the energy field.  The Federal Reserve is expected to hike interest rates this December and several times next year. This suggests higher borrowing rates for consumers. The Federal Reserve will resolve current GDP growth as strong enough to validate its plan to boost the short term federal funds rate to 3% by 2020[footnoteRef:22]. Exports growth was updated down to a seasonally-adjusted annualized rate expansion of 3.7% from the 4.1% increase previously estimated. Similarly, imports growth has a decrease from the 2.1% increase in the first quarter to the 1.6% expansion in the second quarter. [21: https://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm. ] [22: http://www.kiplinger.com/article/business/T019-C000-S010-gdp-growth-rate-and-forecast.html.]

The crude oil price will stablized at $51 per barrel in 2017. The EIA made a statement that there is volatility in the oil market. It reported that commodities traders believe prices could range from $39/barrel and $63/barrel for 2017 delivery. The oil market is still responding to the impact of U.S. shale oil production’s increase along with Russian and OPECs attempt to limit supplies. Lower gasoline sales contributed to the unusually rapid accumulation of gasoline stocks in the first few weeks of 2017. However, on the bright side, it has helped lower the cost of transportation, food, and raw materials for business. Which means it can promote more consumer spending to lift up the economy.

For the PCE, growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, braked to a 0.3 percent rate in the first quarter. Real personal consumption increased by only 0.3 percent in the first quarter, down from an increase of 3.5% in the fourth quarter of 2016[footnoteRef:23]. It's the smallest increase since the fourth quarter of 2009, just two quarters removed from the recession. It's possible this was driven mostly by seasonal factors. The first quarter has the weakest growth over the last few years, the reason is that the one-time parameter like lower energy spending due to warmer weather may have weighed on spending. [23: http://www.businessinsider.com/personal-consumption-q1-gdp-2017-4. ]

Businesses inventories have reached $10.3 billion in Q3, which is down from $49.6 b in Q4. Despite an unemployment rate has reached in 4.4 percent in Q2[footnoteRef:24]. Inflation also decreased, which will force Federal Reserve to raise interest rates this year. The Federal Reserve should start reducing its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities in September. [24: https://www.reuters.com/article/us-usa-economy/u-s-economy-speeds-up-in-second-quarter-wages-continue-to-lag-idUSKBN1AD0GX]

Government spending has reached a 1.7 percent rate as defense decreased to a 4.0 percent rate, which is the largest fall since the fourth quarter of 2014. At the same time, the defense share has become smaller: It was 3.3% in fiscal 2016, versus 4.7% as recently as fiscal 2010. In general, the department of defense spending consumes much larger of GDP during wartime and less during peacetime[footnoteRef:25]. [25: http://www.pewresearch.org/fact-tank/2017/04/04/what-does-the-federal-government-spend-your-tax-dollars-on-social-insurance-programs-mostly/.]

As of stock and bond market, the stock market has reached an all-time high, which lead some investors to put their cash in havens like precious metals and ultra-safe government bonds. Gold has increased to 2.6% this month and it is the 10 year Treasury yield reached a six-week low of 2.1%[footnoteRef:26]. North Korea is also a component which influences the market. Given their constant threats In the same time, the bond market is staging its biggest leap[footnoteRef:27]. The Bloomberg Barclays U.S. Treasury index increased by 0.95%, which is better than the S&P 500 index,[footnoteRef:28]. The prediction of bond market will be stable in 2017, because the rising rates are negatively impacting the market and affecting the financial stocks positively. Overall, the interest rates may rise up in the future given the undervaluation of the current state and the uncertainty is also on the rise, but this uncertainty will drive the market as markets love uncertainty. [26: http://money.cnn.com/2017/08/11/investing/fear-wall-street-stocks-north-korea/index.html.] [27: https://www.bloomberg.com/news/articles/2017-08-31/bond-market-s-biggest-rally-of-2017-amazes-traders-as-fed-looms.] [28: http://investinghaven.com/screening/bond-market-outlook-2017/.]