Weak Dollar Will Jeopardize the US Economic Recovery

Although recent data is signaling that the worst for the US economy may be over, the current pace of growth may not be sustainable. First, the poor condition of the labor market is likely to start having an impact on growth in the form of lower consumer spending. Second, the ongoing weakness in the dollar will eventually make it harder for the US government to keep borrowing money from abroad to stimulate the economy.

Indeed, there are more and more good news coming for the US economy and it is expected that growth may reach as much as 3% in the second half of 2009. In fact, in September industrial production recorded the third consecutive monthly increase and inventories continued to shrink. Moreover, retails sales has grown in August and September even excluding vehicle sales. More importantly, it seems the housing market, probably the biggest cause for the recent financial crisis, has reached the bottom and housing starts and existing home sales have bounced higher.

However, the economy recorded more job losses in September than in August and unemployment rate reached 9.8%, the highest since 1983. Evidently, without growth in employment, households can’t generate income and create demand which is necessary in elevating production levels. In addition, the biggest fiscal deficit on record combined with the anticipation of low interest rates for a long time is discouraging investors from leaving money in the United States and driving down the value of the dollar. This week, US dollar slipped beyond $1.50 per Euro for first time in 14 months. And although a weak dollar has a positive effect on exports, imports prices are also rising bringing the danger of stagflation.

Anna Fedec, contact@tradingeconomics.com
10/21/2009 4:59:46 PM