US Economy Faces Challenges in 2005 and 2006

Strategic Insights -

The US economy is facing several challenges in 2005 and 2006, including a slow and leaden-footed response to Hurricane Katrina, which will have direct implications for federal finances. The clean-up and reconstruction costs from the hurricane are estimated to be around US$200bn, adding to the already deep federal budget deficit. The Economist Intelligence Unit forecasts that the federal budget deficit will expand in fiscal year 2005/06, and US interest rates will continue to rise steadily. The current-account deficit is also expected to widen to 6.7% of GDP in 2005 and 2006.

Key Takeaways:

  • The US president, George W Bush, has been criticized for his and the federal government's slow response to Hurricane Katrina, which has led to a decline in his approval ratings.
  • The clean-up and reconstruction costs from the hurricane are estimated to be around US$200bn, adding to the already deep federal budget deficit.
  • The federal budget deficit is expected to expand in fiscal year 2005/06, and US interest rates will continue to rise steadily.
  • The current-account deficit is expected to widen to 6.7% of GDP in 2005 and 2006.
  • Real GDP growth is forecast to slow to 3.5% in 2005 and 2.9% in 2006 after reaching 4.2% in 2004.
  • Personal debt relative to income is high, making consumers vulnerable to rising interest rates.
  • Rising interest rates are likely to slow the house price boom and could even push house and financial asset prices downwards.
  • The desire to save more, coupled with rising debt-service costs, will cause consumer demand growth to soften towards the end of 2005 and throughout most of 2006.

Statistics:

  • The federal budget deficit is estimated to grow by around US$200bn in 2005/06 due to the clean-up and reconstruction costs from Hurricane Katrina.
  • The current-account deficit is expected to widen to 6.7% of GDP in 2005 and 2006.
  • Real GDP growth is forecast to slow to 3.5% in 2005 and 2.9% in 2006.
  • Personal debt relative to income is around 120% in the US, making consumers vulnerable to rising interest rates.
  • Consumer price inflation is expected to rise by 3.2% in 2005 and 3.3% in 2006.
  • The exchange rate against the euro is expected to average US$1.26:[euro]1 and Y108:US$1.

Sources:

  • The Economist Intelligence Unit's Country Outlook
  • The Federal Reserve's survey on consumer price inflation
  • The US Census Bureau's data on personal debt and income
  • The Bureau of Labor Statistics' data on GDP growth and inflation