SMT007 Magazine

SMT-Dec2014

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14 SMT Magazine • December 2014 economic, political and cultural terms, which are profoundly complex. Brinkmanship would not be an effective tactic. A gingerly and deli- cately executed treatment is in order. The year 2014 appears to be an extension of another relatively low interest rate econo- my even with a modest interest rate increase, which is good for borrowing money to conduct business and corporate- finance activities. The 2013 U.S interest rate of 0.25% was at a historical low, far below the average (6%, with the all-time high of 20% in the 1980s), and the Eurozone was at 0.25%, also a record low, and U.K was at 0.50%. In corporate America, a ris- ing tide (stimulus and low in- terest rate) has raised all boats in the stock market. But many premier companies are taking a hard look at their business strategy and focusing on en- hancing operating margin and profitability. It is an arduous and critical thinking process, but it has to be done in order to be competitive. This process includes where and how the cash-rich multina- tional corporations (collectively holding more than $1 trillion in cash) are going to invest— overseas or domestic; dividend increase or share buyback; operation expansion or mergers and acquisitions. The strategic outcome will impact the job market and the U.S. economy, as will government policies and tax reforms. At the date of this writing, December 1, 2013, the U.S. fiscal policy's holding pattern poses uncertainty and risks to the 2014 economy, and thus to cor- porate actions. Judging from the Chinese government's decision not to pump funds into the economy and its implementation of new reform policies, the commodity prices, tightly linked with the supply and demand dynamics, are expected to stay flat or decline further. Another good sign is that U.S. manufacturing activity is in upward trajectory [2] . Going into 2014, the U.S. unemployment rate should see moderate improvement, hov- ering around 7%, but reaching the 6.5% mile- stone is perhaps a stretch, unless the new Fed Chair's emphasis on employment out of the central bank's dual mandate—maximum em- ployment and stable prices—exerts "miracle" muscle on reducing unemployment. And the Eurozone continues to struggle with a double- digit high unemployment rate. 2014 is also the year that the U.S. Federal Reserve looks for clarity on growth in order to ta- per bond buying. In my view, the Fed should and perhaps would pare back the stimulus in the spring (if not in Decem- ber 2013), at least moderately. With increased underlying strength, the U.S. economy is expected to grow at a faster pace than 2013, barring po- litical debacle in Washington. There is a good chance that the U.S. GDP may recover to 3% or better. Overall, for the first year since 2008, you don't have to be an optimist to see the glass as half full. And China's economy (as does its politics) continues to be a factor!" What Happened in 2014: Indeed, the U.S. economy improved in 2014. As of this writing, the U.S. GDP expand- ed at a seasonally adjusted rate of 3.50% in the third quarter over the previous quarter, accord- ing to the Bureau of Economic Analysis. It looks that 2014 will conclude with a GDP at 3.0% or better. With the improved economy and the controlled spending, the U.S. budget deficit has pushed down to 2.8% of GDP, the lowest level since 2008—a pleasing record! The Federal Reserve ended its monthly bond- purchasing program and dropped a character- ization of U.S. labor market slack as significant. The U.S. unemployment rate reached below 6.0%, per the Labor Department, down to 5.8% as of November 7, 2014, which is better than I predicted. But whether the 5.8% accurately reflects the level of improvement is uncertain. This is due partially to the change in the labor participation rate as many unemployed may 2014: YeAr-eNd revIeW continues SMT proSpECTS & pErSpECTivES 2014 is also the year that the U.S. Federal Reserve looks for clarity on growth in order to taper bond buying. In my view, the Fed should and perhaps would pare back the stimulus in the spring (if not in December 2013), at least moderately. " "

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