Tuesday, August 05, 2003

Some good analysis from Philip Coggan over at FT today.
Those who believe markets are the source of all economic wisdom will also point to US Treasuries. The yield on the benchmark 10-year issue rose by almost a percentage point in July, the fastest turnround in 20 years. Bond yields normally shoot up when investors feel economic growth is returning.

Not everyone is convinced, however, that the economy is simply following the familiar cyclical upswing. The best news has tended to come from the business sector, with sentiment indicators such as the US Institute of Supply Management index and the German Ifo survey showing a rebound in July.

However, the latest survey of US consumer confidence showed an unexpected drop, perhaps connected to the weakness of the employment market. When an economy starts to pick up, a surge in consumer spending is normally one of the primary driving forces. But US and UK consumers have barely stopped spending through the slowdown of the past three years, fuelled by a record build-up in debt. They could hardly spend any more enthusiastically.

That leads many to believe that, if a recovery does come, it will not be as rapid as most previous economic cycles. The consensus forecast for US gross domestic product growth next year is 3.4 per cent, barely faster than the trend rate. Such a recovery would do little to bring down unemployment and would put hardly any upward pressure on prices.
Indeed, most signals suggest that production is gearing up -- but where will the consumption necessary to soak it up come from? In 2003:II, disposable personal income rose just 0.8% -- 0.6% in real terms. Wages and salaries rose a paltry 0.5% (0.37% in private industry), but transfer payments shot up a healthy 1.8%. With jobs continuing to disappear and thus employers holding nearly all the bargaining chips with employees, wages and salaries are unlikely to rise much at all in the near future. We can't count on refi money any longer. As Coggan points out,
First Global estimates that US consumers withdrew as much as Dollars 110bn from their homes in the first half of this year. As yields rise, refinancings will stop, and First Global calculates that withdrawals could drop by as much as Dollars 60bn in the second half.
So I guess it's Social Security and unemployment insurance which will buoy the economy throughout the rest of 2003? Or shall we look for another stock market bubble?

Or more disinflation/deflation?


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