Here Is Why US Economy Is Showing Cracks

The US job market was at its best last year since 1999 as economic activity grew significantly by 5% in the third-quarter of fiscal year 2014 (3QFY14). However, the start of 2015 is slow and the economy seems to be losing its momentum for growth. Experts have lowered their growth expectations for the US economy despite of strong hiring.

Wall Street Investors are looking for some reasons to make big moves this week as Labor data report is due this Friday. The job data report could change the expectations for the interest rate. However, the investors will have to wait until Monday next week as stock market will be closed for Good Friday. Meanwhile, investors will continue to adjust earnings for the first-quarter in lower range. Investors are waiting for the economic data that could wave Fed’s outlook.

A recent Reuter poll for raising rates shows that majority of top banks on Wall Street believes that interest rate will not show a hike until September. However, job report could change the view of the banks as February is marked as the 12th straight month in which employment was above 200,000, which is the highest since 1994.

The US added more than half a million jobs in starting two months of fiscal year 2015, which is 50% higher than the increase in the corresponding months last year. The unemployment rate is down to 5.5%, which is the lowest in last seven years. Health-care, service sector, retail businesses and construction have seen a strong pick in the employment.

According to economists, there are two main issues to be considered that includes the wage rate, which are not growing as expected. The wage rate has not shown much growth and this is the main concern of the economists. In February, Hourly wages were up by 2% only, which is lower than the Federal Reserve Goal of 3.5%. The slow increase in wage rate has limited the Americans to spend less. In addition to the wage rate, international economies, which are not growing instead they are slowing down, are effecting the US economy.

Few economists believe that there is a six-month drag on wage growth as compared to the rate of unemployment. The increase in wage rate reflects the unemployment rate of September 2014 which was 5.9%. Wage growth is considered as a positive indicator of consumer confidence.

Economists are of the view that people do not spend unless they are sure about the future savings. People of the US are saving money on gas as the prices of gas per gallon are lower to $2.42 from $3.53 a year ago. However, people are reluctant to spend their savings. Retail sales and construction of new home missed the estimates in February. The less money spending is raising red flags.

Bernard Baumohl, chief economist at a research firm, the Economic Outlook Group, said: “Most of it was due to the inclement weather we had…I think that kept a lot of shoppers at home.” The investors and shoppers are not confident enough to spend any big amount right now. However, Bernard believes that economy would be rebounding in second quarter of the fiscal year 2015.

According to FactSet Research, analysts are anticipating that first-quarter earnings of the SPDR S&P 500 ETF Trust (NYSEARCA: SPY) companies will be down by 4.6% as compared to the earnings in the corresponding quarter last year, which is a first pullback of earnings in two years time. This has raised concern among investors and is one of the reasons of SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) to be negative for the year. The up and down moves have also resulted in S&P 500 being flat as compared to end of 2014.

The international economies are also moving with a slow pace. European economy has just started to move in the right direction as compared to extremely slow movements in prior years. Japan is stuck in deflation. Furthermore, Greece is again in a problematic situation and Yemen faces a grave crisis.

China being the worst in regards of economic development and strong dollar has added up in the slowdown of growth. The US dollar is at the strongest point in 40 years, which has made the US goods more expensive as compared to other foreign goods. The rise in dollar is hurting US major employers like Caterpillar Inc. (NYSE:CAT) and Microsoft Corporation (NASDAQ:MSFT).

The volatility in the foreign economies is moving the US stock market. Additionally, the rise in dollar has added to the situation negatively. The sluggish consumer outlook and, fear of hike in Fed rate is shaping this year as a rocky roller-coaster ride.

On Friday, Federal Reserve chair Janet Yellen, commented on the situation as: “If underlying conditions had truly returned to normal, the economy should be booming.”