Now that U.S. Federal Reserve chief Janet Yellen has made it clear she's looking out for "some" improvement in the job market before voting for the first Fed interest rate rise in nearly a decade, so is everyone else. The challenge is that the U.S. economy is generating very little inflation - not to mention disinflation coming from China and nearly no inflation in Europe - leaving many questioning whether the Fed even should be considering a rate rise. The U.S. economy only grew by 1.5 percent in the first half of the year, slower than the average 2 percent pace over the previous three years and less than half the speed of past boom times in 2004-2005. Yet the unemployment rate continues to fall, with first time claims for jobless benefits near a 40-year low. That, say some economists, is a cause for concern given rates are still at zero and would normally be much higher at this stage. If the potential growth rate is much lower, then spare capacity in the economy may be close to nil, which means that not only is the business cycle at a mature stage, interest rates may have to move up more quickly than most currently expect. But there are different warning signs, too, not least the strong dollar, which has been keeping down the price of imported goods and has hurt U.S. businesses trying to sell their goods and services abroad by making them more expensive.
The latest gross domestic product data also showed a sizeable buildup of inventories in the first half of the year, which at some point will need to be drawn down, likely slowing production in the process, and with it, economic growth. Next Friday's jobs data is expected to show the U.S. economy created 225,000 new jobs in July, just a tad more than in June, what was deemed a fairly disappointing report, according to economists polled by Reuters. The unemployment rate is expected to hold steady at 5.3 percent.
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Research Associate at Center for Islam and Global Affairs (CIGA) at Istanbul Sabahattin Zaim University
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