Bull watch on economy

Published: March 10, 2016

 photo courtesy of wikimedia commons The Federal Reserve bank is a key component in the current increase of interest rates. When interest rates increase they cause more people to move to bonds.

PHOTO COURTESY OF WIKIMEDIA COMMONS / THE Federal Reserve bank is a key component in the current increase of interest rates. When interest rates increase they cause more people to move to bonds.

MICHAEL HANIFIN
Staff Writer

It seems that in the midst of what seems to be a global bear market, the United States is appearing as a beacon of hope. Sure the beginning of the year was less than stellar with the miss in Gross Domestic Product growth of major economies around the world, but it seems as though the U.S. is making a killer comeback: there is a significant rebound in the junk-bond market, and the rest of the world right now is even referring to the U.S. economy as the world’s main engine for global growth, but is this accurate or even practical?

Many heavily in-debt U.S. companies that harbor less-than ideal credit ratings have seen a lot more business with the returns on junk-bonds turning positive this year. This inflow was not only a surprise, but also record-breaking; the inflow of cash was around $5 billion. Really only few could have seen this coming, considering the sharp sell-off of junk-bonds at the beginning of the year, and though this news may have come as a surprise, it should be welcomed. These investors would not have put their money into bonds that have a high default risk if they did not believe in these businesses and their ability to pay their debt, in combination with the fact that since there is no money in safer assets, investors feel confident enough in the U.S. economy to buy higher-yield, and higher risk, assets. This surge put many people’s worries of a recession at rest for the time being. Moreover, the junk-bond market is not the only risky asset that investors have recently been buying into: certain stocks and commodities. This is one reason we saw a recent surge this month from the S&P 500 and Dow Jones.

Furthermore, with much of the ambiguity and negative outlook on the global economy, many investors around the world have looked to the U.S. to carry them along. Because of the fall in commodity prices in combination with the slowing Chinese economy, many people are turning to the sturdier consumer driven U.S. economy, especially since 23 percent of the global growth last year was because of the U.S. economy, and is expected to contribute another 21 percent this year. These growth numbers have not been this high since 2003. While many proud Americans can breathe a sigh of relief at the prospect of the U.S. economy avoiding an individual recession, for now anyway, the U.S. economy’s relative strength will not be enough to pull the global economy out of its current slump.

It is comforting to know that the global economy is not taking America down with it, and while this should make us, as Americans, happy, we should not act like we are in the clear yet. The U.S. is surrounded by a dismal global economy and may very well take an unpleasant turn in the form of a long recession, but for now at least we can take pride in our impressive comeback so far this year.

Contact the writer: michael.hanifin@scranton.edu

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