China Stimulates Economy to Keep Deflation at Bay

Experts predicted the Chinese economy to slow down for the last five years but it never happened-until now. Instead, the economy continued to grow and develop moving from copying technology to inventing some of their own. As the world’s No. 2 economy it has recently recognized that significant slowing in Asia and Europe may be hampering its own growth and it is taking precautionary measures to prop up its position. 

In an attempt to support development and investment it slashed interest rates at the time when American’s have weaned themselves off easy money policies. By injecting credit into their financial system they hope that their banks will lend more money and encourage higher levels of investment. The interest rate on the one-year loan has been reduced to 5.6% while the rate of pay on a one-year savings rate is now 2.75%. 

A low interest and saving rate combination incentivizes borrowing money for growth while discouraging the hoarding of cash by more profitable businesses. Through keeping the money flowing in and out of large banks it sparks higher levels of economic activity. It is believed that lower lending and borrowing rates will spark higher levels of investments. 

China’s economy has been growing through cheaper production costs and higher levels of investment. As the world experiences a slowdown and major nations are stimulating their economies China has decided to jump onboard.  Only the U.S. is projected to keep growing. 

With a growth rate of 7.3% and a decline in housing value the Chinese economy slowed. It is still an impressive number and the Chinese sought to weather into more sustainable growth pattern but a global slowdown has them on edge. China must continue to export at significant levels or risk moving into a deflationary position.

Are Lower Fuel Prices Acting Like an Economic Stimulant?

Fuel prices are heading downward to the merry of consumers and corporations alike. At the pump are some of the lowest prices we have experienced in over four years. Low fuel prices are not only helpful for families trying to balance their budgets but also businesses that benefit from lower costs of building, manufacturing, and distributing products. Low fuel prices could potentially have a positive influence on economic growth in many of the same ways as a stimulus.

Consumer Disposable Income: Fuel is an expense that families must pay in order to get to work, drive their kids to school events, or go to the grocery store. Families may cut back on traveling in lean years but generally rely on their automobiles for daily errands. When fuel prices decline the amount of money families must spend also declines creating greater disposable income for purchasing other products. 

Lower Business Costs: It costs companies to truck products from one location to the other. It also costs business to run lights, equipment, and other aspects of their operations. Lowering fuel prices also lower costs on everything that is included in the process of obtaining resources, manufacturing items and distributing. 

Acts as a stimulus: Lowering energy and fuel costs is one way to encourage businesses to grow and development. The rewards are exclusively held within the country even though international consumers reap benefits from cheaper American products. Just like interest rates encourages investment so does lower business costs that way on profit margins. 

A study by Aucott and Hall (2014) analyzed the effect of the price of fuel on GDP from 1950-2013. Their study included fossil fuels and nuclear ore on the growth of the economy. They found that the cost of energy has a significant impact on national growth. If the percent of GDP spent on fuels rises above 4% there are implications for slowing economic growth. 

Consumers may be happy with the lower gas prices but companies are also clicking their heels. The more their businesses are tied to the cost of fuel like the airline, manufacturing, and distribution industries the happier they are. Lower fuel costs act like a mild stimulate on the economy that encourages businesses to expand operations and consumers to get out of the house and spend. 

Aucott, M. & Hall, C. (2014). Does a change in price of fuel affect GDP growth? An examination of the U.S. data from 1950-2013. Energies, 7 (10).

GDP Improves 4% in Second Quarter

The winter chill has thawed and the economy has rebounded 4% in the second quarter surpassing the governments expectations by 3%. In a spat of heightened economic activity improvement marks a continued trend of increasing economic gain after one of the nation’s worst recessions. The numbers provide some relief for those worried about the previous quarter’s retraction.

“Today’s advance estimate of real GDP is a positive signal that our economy is continuing its steady rebound,” stated U.S. Secretary of Commerce Penny Pritzker. She also highlighted that it is necessary to continue work to ensure the rebound is long lasting. 

The plan is to encourage “more companies to export, increase foreign direct investment in the United States, strengthen regional manufacturing and economic development hubs, ensure workers have the skills to find jobs businesses need to fill, and unleash more of our data, all of which helps businesses grow and create American jobs.”

The numbers are complemented by an increase in retail and food services sales, durable goods orders, wholesale trade, new residential sales, personal income, employment and improvement in exports. Housing construction was down substantially but didn’t seem to be creating significant drag. 

Despite the downturn in new construction the overall factors have been positive. Improved international outlook, higher consumer spending, and slack in the system seems to be tightening. Hopefully it will maintain its momentum into the next few quarters.

The Federal Reserve is also cutting its bond from $25 billion from $35 billion. The program was designed to encourage businesses to spend instead of save. As the economy moves to a cruise control stage there is less need for government interference. 

We have a lot to feel thankful for as we move out of the recession period. Increased economic activity will require additional adaptation and investment by companies. With any luck the parity costs of manufacturing with nations like China may provide additional help with investment stimulus and job creation.