What's going on?
Lots of positive data about the US consumer and overall economy was released on Friday – and it’s contributing to an emerging belief that the US economy hasn’t been derailed as much as some feared.
What does this mean?
Investors have been quite concerned that US economic growth was slowing. We mentioned numerous times that a lot of pressure was on the consumer to, as we put it, hold up the fort. Well, Friday’s data suggests they did that in January, as they both made more money and spent more of it than expected.
Also, inflation (a.k.a. rising prices), excluding food and energy, rose 1.7% versus a year earlier – which is indicative of a healthy economy (e.g. people being able to afford to pay higher prices for things). Finally, revised data on fourth quarter economic growth painted a better picture than previously thought – with a 1% growth rate rather than 0.7%, which was the official initial estimate.
Why should I care?
For you personally: Pretty much everyone likes a growing economy. You’re more likely to get hired (or get a raise if you already have a job). For non-Americans, a healthy US economy should help other economies do well (Americans buy more goods from abroad and are more likely to travel to and spend money in Europe, for example). Remember though, this data is for January – some recent data for February is looking more troubling.
For markets: Some positive economic signs…ergo, interest rates up? We’ve already seen stocks rise as the economic data has improved. Now, expectations that the US Federal Reserve (“the Fed”) will raise interest rates again are increasing (because doing so creates a bit of an economic headwind, the Fed tends to only raise rates when the economy can withstand it). Such a move is positive for the US dollar versus other currencies because investors would get paid a higher rate of interest versus, say, the Japanese Yen, and therefore people rush to buy dollars. But it does make it more difficult for stocks to go up due to the economic headwind.