Investment Analysis

Overseas Headwinds Test U.S. Economy

by: JOSH ZUMBRUN

Jan 02, 2015

Click here to view the full article on WSJ.com

QUESTIONS: 

1. (Introductory) Provide two pieces of evidence that show the strength of the U.S. economy heading into 2015.

1 The nation added 2.7 million jobs in 2014 through November, the best year for employment growth since 1999.

2 Economic output registered its best six-month stretch since 2003.

2. (Advanced) What are the current problems in the Euro-zone, China and Japan that could dampen U.S. economic growth in 2015? Using an aggregate supply/demand framework, show how these problems could impact U.S. economic output and price levels in the coming year.

1. The Eurozone remains lethargic with some of its members, like Italy, tumbling into a third recession since the financial crisis.

2. China’s economy has been hit by slumping real estate, weak domestic demand and tumbling industrial production.

3. Japan notched two quarters of contraction, heralding another recession.

Since the demand of U.S. exports decreases, the price lever and output GDP will also decline as shown above.

3. (Advanced) What are two other overseas issues that could negative impact the U.S. economy? Carefully explain which components of U.S. GDP would be impacted by these problems. What action could the U.S. Federal Government take, if any, to minimize the negative effects to the U.S. economy?

One is plunging oil prices and the other one is global deflationary trends.

As the oil prices fell, there will be negative effects on investment in the energy sectors.

Lower oil prices are helping drag down inflation. With central bank interest rates already around zero, the ability of monetary policy to offset these price falls and help bring inflation back toward the 2% target is limited.

Federal Reserve Chairwoman Janet Yellen has laid the groundwork for the central bank to raise interest rates around midyear. She will need the economy to cooperate in...