The U.S. economy is practically assured of an interest-rate increase. The latest data also reveals cracks in the U.S. success story that renew questions about how long the American economy can function without global problems having an effect.
Another month of strong jobs growth (unemployment at an eight-year low) highlighted the continued good health of the U.S. economy, and likely gave the Federal Reserve the last piece of evidence it needs to raise interest rates.
The U.S. economy activity is in stark contrast to its global counterparts’ actions. Recently, the European Central Bank cut rates and extended its quantitative easing program to counter a struggling euro zone economy and weak inflation. It joins 43 central banks around the world, including Canada, that have reduced interest rates this year.
The U.S. trade deficit widened to $43.9-billion (U.S.) in October, largely as a result of sliding exports. The combination of weak foreign demand and a rising U.S. dollar have led to a decrease in U.S. exports.
Canada’s trade deficit ballooned to $2.8-billion (Canadian) in October due to a slump in exports to the United States.
Experts believe the U.S. economy’s reliance on exports is small enough that its economy can weather weak demand outside its borders fairly well, as long as the job-creation rate remains stable.
The U.S. manufacturing output has actually slipped into decline.
The services side – which represents more than three-quarters of the U.S. economy, and is more closely linked to domestic demand than are goods-producing sectors such as manufacturing – is also in decline.
According to Bank of Canada Governor Stephen Poloz, the Fed rate hike reflects a growing U.S. economy, which translates to stronger demand for Canadian exports. The central bank has long viewed this demand recovery as the key to sustaining Canada’s own elusive economic resurgence especially now that the oil shock has stifled business investment, and the highly indebted consumer sector has exhausted much of its capacity to drive further economic growth.
Unfortunately, Canadian export volumes have now fallen three months in a row, despite persistent weakness in the Canadian dollar that should be making Canadian goods increasingly attractive to U.S. buyers. This is because there’s a portion of Canadian exporters who suffer when the U.S. dollar is strong, mainly those who are part of the supply chain for U.S. manufactured export goods.
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