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US Is Getting Back In Shape


Image source: Ken Wolter / Shutterstock.com

What's going on?

A bunch of US economic reports were released on Friday. They were all pretty positive and it now looks even more likely that the economy has picked up notably after an apparently weak first quarter.

What does this mean?

A report on “retail sales” (which are sales from stores to regular people like you and me) showed a healthy 2.7% increase in June versus one year earlier. Retail sales matter because they are an indication of consumer spending, which makes up two-thirds of economic activity in the US.

Other data suggested manufacturing activity (e.g. goods made in factories) hit its strongest level in almost a year. And yet another report suggested that inflation is picking up – and rising prices can themselves be a sign of a stronger economy (e.g. more demand for things leads to higher prices).

Why should I care?

For the markets: Stocks hit all-time highs last week – and an improving economy might be the main reason why.

There are lots of factors that influence stock prices so it’s difficult to pinpoint any single thing. But investors’ views of the economy have improved meaningfully in recent weeks and fears of a contracting economy (e.g. a recession) seem to be off the table – and that’s quite possibly been the main factor pushing stock prices higher.

The bigger picture:
All this good news could lead to an interest rate increase and a higher US dollar.

A stronger economy gives the US Federal Reserve (“the Fed”) more room to raise interest rates (because the economy can better withstand the tougher conditions that higher interest rates usually create). As it becomes more likely that the Fed will raise interest rates, it’s typical for the US dollar to rise in value and for it to get a little tougher for US stocks to go up (although, of course, a strengthening economy can outweigh the negative effects of higher expected interest rates).

Originally posted as part of the Finimize daily email.

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