World’s largest economy optimistic for second half recovery

The US economy, which is the world’s largest, is looking towards a recovery in the latter half of the year, which, according to the Federal Reserve, may lead to cut in its financial stimulus plan.

The economy is expected to contract at a much slower pace with output expected to shrink between 1% and 1.5% this year. This has been revised from a forecast in May of between 1.3% and 2%.

However, the Fed has warned of rising unemployment with the rate expected to exceed the 10% mark - higher than previous forecasts.

In a bid to boost the economy and stimulate recovery, interest rates in the US have been aggressively cut and are currently at a rate of almost zero.

In a statement, the Fed said: “Consumer spending appeared to have stabilised since the start of the year, sales and starts of new homes were flattening out, and the recent declines in capital spending did not look as severe as those that had occurred around the turn of the year.”

“Moreover, it seemed likely that economic activity was in the process of levelling out, and the considerable improvements in financial markets over recent months were likely to lend further support to aggregate demand,” it added.

The Fed also highlighted that “improved market conditions and declining use of the facilities warranted scaling back, suspending, or tightening access to several programs.”

Earlier this year, US President Barack Obama unveiled a $787 billion stimulus package of tax cuts and increased Government spending in an effort to boost growth within the economy.

In related news, the Commerce Department revealed a rise in US retail sales in June of 0.6% and follows on from the increase of 0.5% in May. Analysts had forecast a rise of 0.4% for the month.

Sales were driven by higher petrol costs, cars and car parts, when stripping out these items, sales declined 0.2% - the fourth consecutive fall.

Furthermore, the Labor Department said that US wholesale prices rose in June. Its Producer Price Index (PPI) gained 1.8%, while stripping out food and energy bills, core wholesale prices were up 0.5%.