The U.S. will not continue to see double-digit profit gains and 4% business growth. Productivity growth for 1999 is projected to taper off. Recent data suggests that while the housing industry is still strong, it most likely has peaked. The trade deficit is holding but probably will get worse. Domestic demand and capital spending, most importantly, will slow down. Economists aren’t ready to predict a recession with indicators such as mortgage loan applications and jobless claim continuing to indicate strength.
Much of the recent data does, however, confirm that productivity growth is set to slow for more than one-quarter. The three issues that suggest a bleak cut look are slower global growth, more restrictive financial conditions, and a profits recession. The U.S. economy has not faced this tough combination of factors in quite some time.
Federal Reserve Chairman Alan Greenspan confirmed the current situation in a speech the week before a Fed policy meeting. Greenspan stated that “the U.S. could not remain “an oasis of prosperity” amid global troubles. In just a few short months the foreign crisis has started to restrain U.S. economy and these effects are most likely to intensify.” Greenspan’s statements have experts predicting an interest-rate cut by the Feds.
At a time when the annual core inflation has seen the fastest increase in more than a year, a rate cut could increase inflation in the U.S. According to Greenspan, however, going ahead with a rate cut would still keep inflation tame. Foreign economic conditions with their effect on the domestic market will allow for a slowdown in the growth of the U.S. economy to be sufficient to keep inflation down.
However, the Fed must move cautiously with a rate cut, since a cut could bring a decline in the dollar in foreign markets. Just in anticipation of a rate cut, the dollar has declined by more than 5%. The growing U.S current account deficit is also contributing to the fear of a weaker dollar abroad. The deficit has reached a record $56.5 billion in the second quarter and it’s growing at a rate that almost always has currency markets calling for weaker currency values to correct the situation.
U.S. business despite a strong U.S. economy will see a slower fall and winter. Foreign trade is declining quickly since U.S. domestic demand is stronger than global demands. However, the global situation is not going away and sees no end in the near future, which will have U.S businesses seeing slimmer profits this fall and winter.