Saturday, December 1, 2007
Friday, September 14, 2007
RBC Cash Consumer Index Down In August
US consumer confidence on one popular index tumbled to its lowest point in over a year as the housing slump and the credit crunch seem to be making people more worried about what exactly the immediate future has in store.
The RBC Cash Index showed consumer confidence at 71.1 in September, a sharp drop from August's reading of 89.3. This was the worst showing on this particular index since May 2006, when higher gasoline prices shook peoples' sense of economic well-being.
On another front, the Commerce Department reported Friday that retail sales increased 0.3 percent in August, compared to July, when sales went up by 0.5 percent. The strength last month was led by a 2.8 percent jump in auto sales, the biggest increase since July 2006. Again, as we can see below, things seem to be slowing:
The Federal Reserve also reported today that industrial production was up just 0.2 percent in August. This was the poorest performance in three months and reflected a 0.3 percent drop in output at U.S. factories, the first decline in manufacturing after five straight increases.
The 0.3 percent gain in industrial output followed much stronger increases of 0.5 percent in July and 0.6 percent in June. The drop in manufacturing output was accompanied by a decline of 0.6 percent in mining, the category that includes oil production. These declines were offset by a 5.3 percent surge in output at the nation's utilities, reflecting a hotter-than-usual August.
Looking at the chart, again the pace of increase in manufacturing output definitely seems to have slowed since June:
The RBC Cash Index showed consumer confidence at 71.1 in September, a sharp drop from August's reading of 89.3. This was the worst showing on this particular index since May 2006, when higher gasoline prices shook peoples' sense of economic well-being.
Subprime worries, softening job markets, rising gas prices and an unstable stock market have taken a serious toll on consumer sentiment, according to the most recent results of the RBC CASH (Consumer Attitudes and Spending by Household) Index, which measured the attitudes of 1,000 Americans earlier this week. Consumer confidence tumbled across the board, reaching the lowest level since May 2006, as Americans view the current economy negatively and display growing pessimism about the future. As a result, the overall RBC CASH Index, released today by RBC, stands at 71.1 for September 2007, more than 18 points below August's 89.3 level.As we can see from the chart the index does move around a bit, but then apart from the small spike in August it has been steadily heading down since February, and it does fit in with other data we have been getting, so..........
On another front, the Commerce Department reported Friday that retail sales increased 0.3 percent in August, compared to July, when sales went up by 0.5 percent. The strength last month was led by a 2.8 percent jump in auto sales, the biggest increase since July 2006. Again, as we can see below, things seem to be slowing:
The Federal Reserve also reported today that industrial production was up just 0.2 percent in August. This was the poorest performance in three months and reflected a 0.3 percent drop in output at U.S. factories, the first decline in manufacturing after five straight increases.
The 0.3 percent gain in industrial output followed much stronger increases of 0.5 percent in July and 0.6 percent in June. The drop in manufacturing output was accompanied by a decline of 0.6 percent in mining, the category that includes oil production. These declines were offset by a 5.3 percent surge in output at the nation's utilities, reflecting a hotter-than-usual August.
Looking at the chart, again the pace of increase in manufacturing output definitely seems to have slowed since June:
Tuesday, September 4, 2007
US August 2007 PMI
U.S. manufacturing expansion slowed in August from July according to the Institute for Supply Management monthly report. The ISM index of national factory activity eased to 52.9 last month, its lowest since March and down from 53.8 in July. Analysts had been looking for a more modest dip to 53.0, although any reading above 50 still points to expansion.
US Construction Spending July 2007
Construction activity plunged in July by the biggest amount in six months as spending on homes fell for a record 17th straight month. The Commerce Department reported Tuesday that construction spending dropped 0.4 percent in July, compared with June, the weakest showing since a 0.6 percent fall in January. It was a bigger drop than economists had been expecting and underscored the continued drag the severe slump in housing is having on building activity. Overall spending dropped to a seasonally adjusted annual rate of $1.169 trillion after having posted a 0.1 percent increase in June. Housing activity fell by 1.4 percent, more than double the 0.6 percent decline in June, and has now declined for a record 17 straight months as US home building suffers its worst slump in 16 years.
Here's the chart.
Here's the chart.
Friday, August 31, 2007
US GDP 2007 Q2
The US Commerce Department on Thursday this week boosted its initial estimate of second-quarter 2007 growth in gross domestic product revising the rate from the 3.4 percent advance estimate of a month ago, to the 4.0 per cent in this preliminary estimate. While the second-quarter pace was the fastest since the start of 2006 and eclipsed the first quarter's anemic 0.6 percent rate, many analysts are suggesting that growth has peaked and will slow sharply in coming quarters. Strong business investment and higher exports were a big part of the picture in the second quarter, but this was, of course, before the onset of turmoil in credit markets that is expected to put a brake growth. Here's the chart.
University of Michigan Consumer Confidence Index August 2007
US consumer confidence as measured by a University of Michigan survey dropped sharply in August, falling by 7 points to 83.4, a 12-month low. Here's the chart:
US Consumer Spending July 2007
The US Commerce Department reported yesterday that consumer spending rose by 0.4 percent in July, double the June increase. The spending was supported by a solid 0.5 percent rise in incomes, the best showing in four months.
The gain in spending was in line with analysts expectations, although the increase in incomes was nearly double what many had expected. However, many observers have cautioned that the July increases could be temporary given recent weakness in consumer confidence caused by the prolonged slump in housing and the past few weeks of financial market turbulence. Here is the chart for consumer spending:
And here's the chart for month by month changes in personal income growth:
and here is the same information showing the annual change over the previous year.
The gain in spending was in line with analysts expectations, although the increase in incomes was nearly double what many had expected. However, many observers have cautioned that the July increases could be temporary given recent weakness in consumer confidence caused by the prolonged slump in housing and the past few weeks of financial market turbulence. Here is the chart for consumer spending:
And here's the chart for month by month changes in personal income growth:
and here is the same information showing the annual change over the previous year.
Conference Board Consumer Confidence Index
Well, for what it is worth, here is the latest reading from the Conference Board Consumer Confidence Index:
The Conference Board Consumer Confidence Index, which had surged in July, gave back all of the gain in August. The Index now stands at 105.0 (1985=100), down from 111.9 in July. The Present Situation Index decreased to 130.3 from 138.3 in July. The Expectations Index declined to 88.2 from 94.4.
Says Lynn Franco, Director of The Conference Board Consumer Research Center: "A softening in business conditions and labor market conditions has curbed consumers' confidence this month. In addition, the volatility in financial markets and continued sub-prime housing woes may have played a role in dampening consumers' spirits. But, despite less favorable conditions and in spite of all the recent turmoil, consumers still remain confident. And, current Index levels suggest further economic growth in the months ahead."
S&P/Case Shiller Housing Indexes Q2 2007
Well, as they say, you should always take a quick glance at the charts that lie behind the news. So let's do this with today's AP story on the drop in US house prices. Here's the story as published:
Now what this story unfortunately omits to tell us is that, in fact, the nationwide housing index has only really fallen significantly on one other occasion during this period, and that was between 1990 and 1993. Lets look first at the chart for this period.
As can be seen the index peaked in Q2 1990 and didn't get back up past the peak level till Q2 1994. (Of course this period did coincide with the election of President Clinton, a point which won't be lost of some of the more astute observers). Now if we compare this with an initial glance at the present slowdown, certain things become evident right from the start.
The first of these is that in comparison with the earlier housing correction, this one, on aggregate, is still not that dramatic. This doesn't mean that it won't turn into a much more serious correction, but at the present point the damage is relatively contained. This becomes even more apparent if we look at a rather longer time series.
Here we can see that house prices really have had a very big run up since 2000, and the downside possibilities really would be quite large if the correction were to turn into a price rout, but at this stage, all we can say is that this isn't happening. In this sense the latest data are really not inconsistent with the picture we were getting from the national Association of Realtors data yesterday.
Going back even further in time only makes all of this even clearer.
Finally, and just for good measure here is the Case Shiller Composite Index, which even if it doesn't effectively add anything new to the picture, does at least serve to complete our collection of charts.
Housing prices: Steepest drop in 20 years
U.S. home prices fell 3.2 percent in the second quarter, the steepest rate of decline since Standard & Poor's began its nationwide housing index in 1987, the group said Tuesday. The decline in home prices around the nation shows no evidence of a market recovery anytime soon. MacroMarkets LLC Chief Economist Robert Shiller said the declining residential real estate market "shows no signs of slowing down." The index tracks the price trends among existing single-family homes across the nation compared with a year earlier .A separate S&P/Case-Shiller index that covers 20 U.S. cities fell 3.5 percent from a year earlier. A 10-city index fell 4.1 percent from a year earlier.
Now what this story unfortunately omits to tell us is that, in fact, the nationwide housing index has only really fallen significantly on one other occasion during this period, and that was between 1990 and 1993. Lets look first at the chart for this period.
As can be seen the index peaked in Q2 1990 and didn't get back up past the peak level till Q2 1994. (Of course this period did coincide with the election of President Clinton, a point which won't be lost of some of the more astute observers). Now if we compare this with an initial glance at the present slowdown, certain things become evident right from the start.
The first of these is that in comparison with the earlier housing correction, this one, on aggregate, is still not that dramatic. This doesn't mean that it won't turn into a much more serious correction, but at the present point the damage is relatively contained. This becomes even more apparent if we look at a rather longer time series.
Here we can see that house prices really have had a very big run up since 2000, and the downside possibilities really would be quite large if the correction were to turn into a price rout, but at this stage, all we can say is that this isn't happening. In this sense the latest data are really not inconsistent with the picture we were getting from the national Association of Realtors data yesterday.
Going back even further in time only makes all of this even clearer.
Finally, and just for good measure here is the Case Shiller Composite Index, which even if it doesn't effectively add anything new to the picture, does at least serve to complete our collection of charts.
US Midwest Manufacturing Index July 2007
Well, for what it's worth here's this months reading on the Chicago Fed Midwest manufacturing index:
Since January the trend has been steadily up, though midwest manufacturing obviously took a significant knock at the end of last year, as a result the year on year reading is not that substantial. Clearly the line is up though, which to some extent must be a consequence of the relative weakening of the dollar.
As Reuters says:
Since January the trend has been steadily up, though midwest manufacturing obviously took a significant knock at the end of last year, as a result the year on year reading is not that substantial. Clearly the line is up though, which to some extent must be a consequence of the relative weakening of the dollar.
As Reuters says:
The Chicago Federal Reserve Bank said on Monday its Midwest manufacturing index rose in July amid broad-based gains in all sectors.The index gained 0.6 percent to a seasonally adjusted 106.0 from an upwardly revised 105.3 in June, originally reported at 104.9. Still, compared with a year earlier, Midwest factory output was only 0.5 percent higher, trailing the 1.9 percent national increase in industrial production. Output in all four of the regional manufacturing sectors tracked by the Chicago Fed rose in July. The biggest gain came in resource output, up 1 percent on strength in food, wood, paper and chemical production.Resource production ran 3.2 percent above a year ago, outpacing the national 1 percent increase, while year-on-year output fell in the auto, steel and machinery segments.Midwest machinery sector output for July rose 0.8 percent from June but was down 0.7 percent from a year earlier.Auto sector production rose 0.3 percent and steel output was up 0.7 percent in July The Chicago Fed Midwest Manufacturing Index is a monthly estimate of manufacturing output in the region by major industries. The survey covers the five states that make up the seventh Federal Reserve district: Illinois, Indiana, Iowa, Michigan and Wisconsin.
Following is a breakdown of the index components:
Percent change:
July June July 07/06 CFMMI +0.6 +0.4 +0.5 Auto +0.3 +0.1 -0.1 Steel +0.7 -0.3 -0.7 Machinery +0.8 +0.2 -0.7 Resources +1.0 +1.2 +3.2
Monday, August 27, 2007
US Economy Reality Check
This is the first of a series of posts which will try to get to grips with the state of the global economy in the wake of the recent liquidity turbulence.
The Story So Far
As indicated in this post, the big danger we face at the present time is that the current liquidity crunch converts itself into a credit crunch. This may or may not happen. For it to happen there needs to be a pretty systematic ongoing process of interaction between the financial markets and the real economy in such a way that the negative components of each of them reinforce each other. As far as the global economy goes, there are a number of key sectors to keep an eye on: the US, China, India, Germany, Japan, Italy and Eastern Europe. Eastern Europe is especially important, not for its magnitude, but for its growth rate, and its significance in the recent expansion of high risk new credit.
Now Germany, Japan and Italy all seem to be slowing considerably at the present time (for Geramny see here, for Japan see here, for Italy see here). China is more or less on course - now a touch this way, now a touch that, as is India. Eastern Europe is starting to overheat badly (and here, and here, and here).
And the US? In many ways the US could tip the balance one way or the other. So watching how things play out in the US in the coming weeks and months can prove to be critical.
One of the issues at the moment is that the financial markets are a bit adrift due to the lack of real data, so what little news there is is rapidly pounced on.
Today we have two pieces of "news" from the US. The UBS investor optimism index, which you can see below.
Obviously the index has been trending down slightly of late, but it is hard to read any deep significance into this, since it has been moving up and down quite vigourously throughout the present business cycle.
The other piece of data we have to say is the existing homes sales index for July from the US National Association of Realtors.
Now clearly the volume of sales has dropped off considerably, about 9%, as compared with a year ago. And this does mean that the rate of turnover in the market is low. But if we look at the prices index (see below) then - at least nationally - the price decline situation is far from dramatic. I would expect to see a lot worse in some of the most vulnerable European economies (Spain, Ireland, Greece) if the liquidity crunch really does turn into a credit crunch. At the present time all we can say is that this outcome represents a possibility, but it is still certainly by no means an inevitable eventuality.
However, as DailyFXnote, this data is now to a certain extent history:
Essentially there is anecdotal evidence all over the place that people have started to find it much more difficult to obtain mortgages, even people who are in no way "sub-prime", so it is hard to believe that existing home sales in August won't be well down, which is just one of the reasons why Bernanke may be seriously considering a rate reduction in September, and one of the reasons why Jean Claude Trichet may be having second thoughts, since some Eurozone economies will be very sensitive to any credit conditions tightening. This is going to be a very hard call for them all.
Now this chart needs a bit of explanation, since I have done a bit of simple improvisation. The bars in brown represent average prices for 2004, 2005 and 2006 respectively. I have put them alongside the monthly time series for 2006 and 2007 (the blue bars)just so people can get an idea of the orders of magnitude involved, and of the size of the "correction" - at least to date. Of course, the big outstanding question is whether the slowdown in turnover will eventually translate itself over into a more substantial price reduction. I would say that that is really the big outstanding "what if" question at this point in the US business cycle, and why I think it is possible that things can move one way or another, depending really on the conditions under which US banks are prepared to lend money to first time buyers.
Obviously there is a correction going on, but to date it is hardly a dramatic one. There are still plenty of sales, and prices are not falling dramatically. Clearly there are a lot of delinquencies in a relatively small part of the US market, but does this have to bring the whole global credit industry to a halt? I find that hard to believe.
Obviously people are nervous for a whole variety of reasons, and this nervousness is currently focusing on the US most risky mortgages sector. But these people also represent some sort of version of "moral hazard", since they know that Bernanke will ultimately bail them out, don't they? Isn't that what all the shouting is about. Ouch, it hurts! Please help me.
That all of these cries of pain come from people who supposedly believe in market economies really does make me laugh.
Actually, the whole situation does make me think about how the business cycle is 90% psychological, and about how right Keynes was to talk about animal spirits.
Basically, I think the key market participants are bi-polar, and once they get in a gloomy state then on comes the recession. Obviously there are underlying fundamentals that play a part like this housing correction, but, come on, you could legalise 11 million Latinos tomorrow, and sell them a lot of houses, if this was the only problem. It appears other issues also play their part here. I mean, if they were all legal and regular, a lot of these people would stop being sub-prime, wouldn't they? So why aren't they, and why are some people busily trying to use taxpayers money to build a wall between the US and Latin America? Where is the underlying economic rationale here?
The Story So Far
As indicated in this post, the big danger we face at the present time is that the current liquidity crunch converts itself into a credit crunch. This may or may not happen. For it to happen there needs to be a pretty systematic ongoing process of interaction between the financial markets and the real economy in such a way that the negative components of each of them reinforce each other. As far as the global economy goes, there are a number of key sectors to keep an eye on: the US, China, India, Germany, Japan, Italy and Eastern Europe. Eastern Europe is especially important, not for its magnitude, but for its growth rate, and its significance in the recent expansion of high risk new credit.
Now Germany, Japan and Italy all seem to be slowing considerably at the present time (for Geramny see here, for Japan see here, for Italy see here). China is more or less on course - now a touch this way, now a touch that, as is India. Eastern Europe is starting to overheat badly (and here, and here, and here).
And the US? In many ways the US could tip the balance one way or the other. So watching how things play out in the US in the coming weeks and months can prove to be critical.
One of the issues at the moment is that the financial markets are a bit adrift due to the lack of real data, so what little news there is is rapidly pounced on.
Today we have two pieces of "news" from the US. The UBS investor optimism index, which you can see below.
Obviously the index has been trending down slightly of late, but it is hard to read any deep significance into this, since it has been moving up and down quite vigourously throughout the present business cycle.
The other piece of data we have to say is the existing homes sales index for July from the US National Association of Realtors.
Now clearly the volume of sales has dropped off considerably, about 9%, as compared with a year ago. And this does mean that the rate of turnover in the market is low. But if we look at the prices index (see below) then - at least nationally - the price decline situation is far from dramatic. I would expect to see a lot worse in some of the most vulnerable European economies (Spain, Ireland, Greece) if the liquidity crunch really does turn into a credit crunch. At the present time all we can say is that this outcome represents a possibility, but it is still certainly by no means an inevitable eventuality.
However, as DailyFXnote, this data is now to a certain extent history:
In the US today the markets will get a look at the Existing Home Sales data with consensus call forecasting a small contraction from the month prior. The data is for July and therefore may be a dated in its value as the recent market turmoil has made credit far more difficult and costly to obtain which will likely have a much more depressive effect on home sales as we move into the fall season. The median house price data is expected to fall this year for the first time since federal housing agencies began keeping statistics in 1950 indicating the sharpness of the decline.
Essentially there is anecdotal evidence all over the place that people have started to find it much more difficult to obtain mortgages, even people who are in no way "sub-prime", so it is hard to believe that existing home sales in August won't be well down, which is just one of the reasons why Bernanke may be seriously considering a rate reduction in September, and one of the reasons why Jean Claude Trichet may be having second thoughts, since some Eurozone economies will be very sensitive to any credit conditions tightening. This is going to be a very hard call for them all.
Now this chart needs a bit of explanation, since I have done a bit of simple improvisation. The bars in brown represent average prices for 2004, 2005 and 2006 respectively. I have put them alongside the monthly time series for 2006 and 2007 (the blue bars)just so people can get an idea of the orders of magnitude involved, and of the size of the "correction" - at least to date. Of course, the big outstanding question is whether the slowdown in turnover will eventually translate itself over into a more substantial price reduction. I would say that that is really the big outstanding "what if" question at this point in the US business cycle, and why I think it is possible that things can move one way or another, depending really on the conditions under which US banks are prepared to lend money to first time buyers.
Obviously there is a correction going on, but to date it is hardly a dramatic one. There are still plenty of sales, and prices are not falling dramatically. Clearly there are a lot of delinquencies in a relatively small part of the US market, but does this have to bring the whole global credit industry to a halt? I find that hard to believe.
Obviously people are nervous for a whole variety of reasons, and this nervousness is currently focusing on the US most risky mortgages sector. But these people also represent some sort of version of "moral hazard", since they know that Bernanke will ultimately bail them out, don't they? Isn't that what all the shouting is about. Ouch, it hurts! Please help me.
That all of these cries of pain come from people who supposedly believe in market economies really does make me laugh.
Actually, the whole situation does make me think about how the business cycle is 90% psychological, and about how right Keynes was to talk about animal spirits.
Basically, I think the key market participants are bi-polar, and once they get in a gloomy state then on comes the recession. Obviously there are underlying fundamentals that play a part like this housing correction, but, come on, you could legalise 11 million Latinos tomorrow, and sell them a lot of houses, if this was the only problem. It appears other issues also play their part here. I mean, if they were all legal and regular, a lot of these people would stop being sub-prime, wouldn't they? So why aren't they, and why are some people busily trying to use taxpayers money to build a wall between the US and Latin America? Where is the underlying economic rationale here?
Wednesday, January 17, 2007
The US Economy In Perspective
The future of the US economy is a topic which is the focus of considerable debate these days, what with all the talk of hard and soft landings, customers of last resort, global uncoupling etc etc etc. In part Claus Vistesen has addressed some of the underlying structural issues in the previous post, and in part, as Stephen Roach suggests in this post earlier in the week, the future outlook for the US economy is in large measure also a question of whither the global economy, in the rather novel sense that growth in the US now depends to some significant extent on economic performance elsewhere. Indeed it is perhaps the central message of this forum that global conditions now influence national economic performance to a greater extent than has ever been the case in the past.
That being said, there is also some considerable value to be found in examining the evolution of the US economy in its own terms, to try and get a measure of where exactly it is headed, and what the general outlook for 2007 is likely to be. This is the topic I will directly address in this post, whilst a subsequent post will examine the underlying dynamic of housing, the labor market and productivity, which are arguably the three fundamental drivers of the forward path of the US economy.
With this objective in mind Ted Wiesman's Monday post on the MS GEF certainly forms a useful starting point (United States Review and Preview). Weiseman's response to the question “Is the US ‘Growth Recession’ Ending?” would appear to be an unequivocal yes, it is. In support of this view he fields a fairly impressive collection of data, ranging from last week's significantly better-than-expected international trade and retail sales reports, to a possible bottoming-out in the inventory cycle, a greatly reduced level of energy prices, and even a comparatively mild winter.
In fact the US trade balance narrowed in November from US$58.8 billion in October to US$58.2 billion, a figure which was a 16-month low, and tucked away in the data is the rather interesting detail that exports (+0.9%) increased significantly faster than imports (+0.3%). This improvement in the trade balance will, of course, impact positively on 4th quarter 2006 GDP.
At the same time retail sales have been improving, gaining 0.9% in December (with auto sales rising 0.3% and ex-auto sales rising 1.0%). Part of the picture here was a 3.8% increase in spending at petrol stations, but the general picture was also positive with sales at electronics stores rising 3.0%, general merchandise 0.9%, restaurants 2.3%, drug stores 1.2%, and furniture stores 0.7%. So there is clearly life left in the US consumer yet awhile.
The important question of course is the sustainability of this trend into the future,and here two issues loom large: housing and energy costs. On the housing front a considerable debate continues to rage. The pessimists take the view that the problem is just beginning, whilst the optimists would like to have us believe that the worst is nearly over (Dave Altig reproduces the data from the Case-Schiller Home Price Index which, as he says, does seem to offer some confirmation for the more optimistic view). Most commentators, however, do continue to point to the high level of uncertainty in this area, and I tend to concur. The incoming data are mixed, and some measures certainly suggest that the housing market is bottoming out, while others do nothing to ease the concern that another downward leg may be yet to come.
We do know that in the final months of 2006 demand for housing started to level out. Mortgage applications - for example - as measured by the Mortgage Bankers Association index, picked up both for purchases and refinancing. New-home sales, on the other hand simply stabilized, inching up from an annualized rate of 979,000 in July to 1,047,000 in November. Even if demand does remain stable at current levels, both construction and house prices could face continued weakness because of the large overhang of unsold homes - which were at a level of 6.3 months of sales for new homes in November (and this figure could yet rise if their are subsequent cancellations).
The November data indicated an uptick in home starts, but new permits continued to decline. This suggests home starts may well weaken once more after the effects of unseasonably good weather disappear. House prices may well stabilize nationwide in 2007, but the aggregate figure may mask substantial variance in local markets and in the sub-prime market, which caters to marginal buyers. Nouriel Roubini has been consistently flagging the subprime end of the picture, and the problems that this may pose should not be underestimated. Delinquency rates on subprime mortgages have already shot up, and credit spreads on sub-prime mortgage pools have widened considerably.
At the end of the day two factors seem to be important here, the inbuilt upcoming demand, and the future path of interest rates. I will comment on the former in my next post, but as regards the latter there does not seem to be any strong reason to expect any sudden and dramatic change in interest rates. Most observers seem to feel that the Fed will now be on hold for the foreseeable future, with the balance of probabilities leaning in favour of an eventual reduction rather than an increase, and of course should the housing market reveal an increased weakness in the coming quarter, the Fed does have considerable room to maneuver if it needs to try and put a floor under the market. Obviously the inflation picture is the one obvious obstacle to freedom of action on this front, but I am not especially pessimistic in this regard. Clearly global conditions will play a part in this regard, but todays decision from the bank of Japan to keep rates on hold gives us one indication of the way the wind is blowing, and as Claus and I will be arguing, there are strong reasons to think that the ECB may be nowhere near as aggressive in raising as some comentators have been imagining.
Clearly another key factor in the situation is the future path of oil prices. Today we learn that the rate of consumer inflation in the US increased for the first time since the summer (also see here) as the consumer price index rose 0.5%, driven, significantly enough, by a rise of 4.6% in energy prices. Oil futures have been falling systematically throughout the second half of 2006 driven by the expectation for rather weaker global growth in 2007, but the most recent estimates (see the IMF view here) suggest that things may not be as weak as had originally been thought (although downside surprises in both Japan and some parts of Europe may be in store, even if China and India and other emerging markets may surprise on the upside) and were this impression to be confirmed then there would obviously be a further upward pressure on oil prices which would have implications for both the US trade balance and for the US CPI.
As to the future course of oil prices things again are far from clear. Richard Berner takes (as is his normal want) the rather optimistic view that prices will be rather more resilient to upswings this time round due to the relative increase in supply capacity, but how robust this will prove to be should global economic growth remain strong throught the year really remains to be seen. And of course, we are still very vulnerable to supply shocks with geopolitical risk being as much in the forefront as ever. Serhan Cevik had a timely piece on the GEF yesterday on the risk of instability which centres on things in Iraq (and in particular, though he doesn't mention this explicitly even if it can't be far from his mind, in Turkey and Kurdistan). At the same time Nigeria is a problem which may well just be waiting to draw itself to everyone's attention).
So all in all a complex picture moving forward with lots of room for uncertainty. At this stage, barring the observation that it seems rather unlikely that the US economy is recession bound in the short term I will refrain from any explicit 2007 growth forecast, there is just too much noise in the data to be comfortable with doing this, and there are plenty of reasons for imagining that we may well have a year in front of us which is well and truly stacked full of surprises.
That being said, there is also some considerable value to be found in examining the evolution of the US economy in its own terms, to try and get a measure of where exactly it is headed, and what the general outlook for 2007 is likely to be. This is the topic I will directly address in this post, whilst a subsequent post will examine the underlying dynamic of housing, the labor market and productivity, which are arguably the three fundamental drivers of the forward path of the US economy.
With this objective in mind Ted Wiesman's Monday post on the MS GEF certainly forms a useful starting point (United States Review and Preview). Weiseman's response to the question “Is the US ‘Growth Recession’ Ending?” would appear to be an unequivocal yes, it is. In support of this view he fields a fairly impressive collection of data, ranging from last week's significantly better-than-expected international trade and retail sales reports, to a possible bottoming-out in the inventory cycle, a greatly reduced level of energy prices, and even a comparatively mild winter.
In fact the US trade balance narrowed in November from US$58.8 billion in October to US$58.2 billion, a figure which was a 16-month low, and tucked away in the data is the rather interesting detail that exports (+0.9%) increased significantly faster than imports (+0.3%). This improvement in the trade balance will, of course, impact positively on 4th quarter 2006 GDP.
At the same time retail sales have been improving, gaining 0.9% in December (with auto sales rising 0.3% and ex-auto sales rising 1.0%). Part of the picture here was a 3.8% increase in spending at petrol stations, but the general picture was also positive with sales at electronics stores rising 3.0%, general merchandise 0.9%, restaurants 2.3%, drug stores 1.2%, and furniture stores 0.7%. So there is clearly life left in the US consumer yet awhile.
The important question of course is the sustainability of this trend into the future,and here two issues loom large: housing and energy costs. On the housing front a considerable debate continues to rage. The pessimists take the view that the problem is just beginning, whilst the optimists would like to have us believe that the worst is nearly over (Dave Altig reproduces the data from the Case-Schiller Home Price Index which, as he says, does seem to offer some confirmation for the more optimistic view). Most commentators, however, do continue to point to the high level of uncertainty in this area, and I tend to concur. The incoming data are mixed, and some measures certainly suggest that the housing market is bottoming out, while others do nothing to ease the concern that another downward leg may be yet to come.
We do know that in the final months of 2006 demand for housing started to level out. Mortgage applications - for example - as measured by the Mortgage Bankers Association index, picked up both for purchases and refinancing. New-home sales, on the other hand simply stabilized, inching up from an annualized rate of 979,000 in July to 1,047,000 in November. Even if demand does remain stable at current levels, both construction and house prices could face continued weakness because of the large overhang of unsold homes - which were at a level of 6.3 months of sales for new homes in November (and this figure could yet rise if their are subsequent cancellations).
The November data indicated an uptick in home starts, but new permits continued to decline. This suggests home starts may well weaken once more after the effects of unseasonably good weather disappear. House prices may well stabilize nationwide in 2007, but the aggregate figure may mask substantial variance in local markets and in the sub-prime market, which caters to marginal buyers. Nouriel Roubini has been consistently flagging the subprime end of the picture, and the problems that this may pose should not be underestimated. Delinquency rates on subprime mortgages have already shot up, and credit spreads on sub-prime mortgage pools have widened considerably.
At the end of the day two factors seem to be important here, the inbuilt upcoming demand, and the future path of interest rates. I will comment on the former in my next post, but as regards the latter there does not seem to be any strong reason to expect any sudden and dramatic change in interest rates. Most observers seem to feel that the Fed will now be on hold for the foreseeable future, with the balance of probabilities leaning in favour of an eventual reduction rather than an increase, and of course should the housing market reveal an increased weakness in the coming quarter, the Fed does have considerable room to maneuver if it needs to try and put a floor under the market. Obviously the inflation picture is the one obvious obstacle to freedom of action on this front, but I am not especially pessimistic in this regard. Clearly global conditions will play a part in this regard, but todays decision from the bank of Japan to keep rates on hold gives us one indication of the way the wind is blowing, and as Claus and I will be arguing, there are strong reasons to think that the ECB may be nowhere near as aggressive in raising as some comentators have been imagining.
Clearly another key factor in the situation is the future path of oil prices. Today we learn that the rate of consumer inflation in the US increased for the first time since the summer (also see here) as the consumer price index rose 0.5%, driven, significantly enough, by a rise of 4.6% in energy prices. Oil futures have been falling systematically throughout the second half of 2006 driven by the expectation for rather weaker global growth in 2007, but the most recent estimates (see the IMF view here) suggest that things may not be as weak as had originally been thought (although downside surprises in both Japan and some parts of Europe may be in store, even if China and India and other emerging markets may surprise on the upside) and were this impression to be confirmed then there would obviously be a further upward pressure on oil prices which would have implications for both the US trade balance and for the US CPI.
As to the future course of oil prices things again are far from clear. Richard Berner takes (as is his normal want) the rather optimistic view that prices will be rather more resilient to upswings this time round due to the relative increase in supply capacity, but how robust this will prove to be should global economic growth remain strong throught the year really remains to be seen. And of course, we are still very vulnerable to supply shocks with geopolitical risk being as much in the forefront as ever. Serhan Cevik had a timely piece on the GEF yesterday on the risk of instability which centres on things in Iraq (and in particular, though he doesn't mention this explicitly even if it can't be far from his mind, in Turkey and Kurdistan). At the same time Nigeria is a problem which may well just be waiting to draw itself to everyone's attention).
So all in all a complex picture moving forward with lots of room for uncertainty. At this stage, barring the observation that it seems rather unlikely that the US economy is recession bound in the short term I will refrain from any explicit 2007 growth forecast, there is just too much noise in the data to be comfortable with doing this, and there are plenty of reasons for imagining that we may well have a year in front of us which is well and truly stacked full of surprises.
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