How prepared is the US economy for a Fed tapering?

Ever since US Federal Reserve chairman Ben Bernanke announced in May the possibility of winding down the massive $85-billion-a-month bond purchases scheme sometime later this year, investors have been frenetically trying to figure out when the withdrawal (dubbed ‘tapering’ by financial markets) will actually take place.

A lot depends on how strong the US is to withstand a lowering of monetary stimulus, also called  ‘Quantitative Easing’. While there are mixed opinions even among Federal Reserve governors as to how soon or late this action should start, the economy isn’t helping either.

Most experts tend to look at six key indicators to gauge the economic outlook in the U.S.:

  • GDP growth (the most obvious number if you’re trying to understand how the economy is faring);
  • housing market figures (new home sales indicate whether the housing market, the victim of a spectacular bust, is making any headway. Higher numbers indicate consumers are feeling more confident about the future and job prospects);
  • unemployment rate (to tell us whether the recovery is jobless or not);
  • retail sales (consumption makes up nearly 70% of the U.S. economy, so this figure is really important);
  • consumer confidence (which tells us what future trends of consumption are likely to be, indicating how consumers feel about income and job security);
  • and manufacturing activity (which tells us how much demand businesses are facing, which provides clues on their hiring and investment  patterns. Improved activity suggests they could increase hiring and investments).

Here’s a chart that provides a snapshot view of all those key indicators (click chart for better view).

US economy
You can see that the latest round of numbers, at best, provide a blurry image to how the U.S.  the world’s largest economy, is faring.  Clearly, the Fed has a tough decision to make. For now, bets are being placed on a tapering announcement somewhere between December this year and April 2014.

[Image Credit]


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