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Friday, June 20, 2003

US Economy: Where's the Post War Boom?

I'm doing a fair bit of blogging today since I'm off on one of those 'European' long weekends tomorrow, so things will probably be a bit 'light' till Tuesday. As I said earlier I'm doing this in a locutorio because the nice people at Wanadoo (the internet subsidiary of France Telecom) have decided to cut off all Barcelona ADSL subscribers for an unspecified period (as of Thursday of last week) for 'improvements'. Apart from the fact that - as they politely inform us - they 'reserve the right to charge even when there is no service available', they also are unable to give any time scale whatsoever. It's the arrogance of all this that I can't stand. I'm afraid in my book these people could all go quietly bankrupt and I wouldn't shed a tear. Also, being a pragmatic - non-religious - buddhist, my policy is not to get uptight about things which I can do nothing about.

Which is why I am here in the locutorio, learning a few things about how the world works and thinking about the US economy (and also dreaming about my new life, starting tommorrow, and thanks to Margy, doing anthropological fieldwork). Now feeling perky since Andy Xie confirmed my instincts about the Chinese economy this year, I feel emboldened to stick my neck out a bit on the US one.

I think the equity markets have it wrong. In fact I'll correct that. I think the main factor driving the equity markets at the moment is interia. The money has to be placed somewhere, so now we are going to try equities. So I don't think you should be reading this as a charge up the expansion ramp. In fact I would stick my neck out even further and say that the Nasdaq at 1600+ is looking disntinctly overpriced to me (but then I may have to eat my words).

I don't expect a real sustained drive in US growth either, this by the default argument, if there's little or no growth elsewhere, I don't see the US 'going it alone', especially when it's on credit and others are effectively paying. Many of the numbers are glass half empty or glass half full stuff. There's some relief in some quarters that new signings for unemployment are dropping, but they are still woefully over the 400,000 threshold. The current account deficit isn't improving any either. So my feeling is that if the recovery is sustained it's likely to be a fragile one, and that means not enough growth to eat up the productivity, and that means...........deflation, say the middle or back end of next year.

There, I've done it, I've stuck my neck out. Now let's wait and see if I'll have to eat my words. Of course it does help in all this top have some theory to help orient my guesswork, let's see if the theory is any good shall we.

Economic gloom lifted slightly on Thursday with reports showing a fall in U.S. jobless claims, signs of a pickup in mid-Atlantic factories and a strong gain in a broad economic forecasting gauge. The Labor Department said first-time claims for unemployment insurance fell for the second week in a row last week, while the Philadelphia Federal Reserve Bank said its June factory index rose after three months of declines. The private Conference Board said its leading indicators index in May logged its largest rise since December 2001, while a separate Commerce Department report said the U.S. current account deficit widened nearly 6 percent in the first quarter to a record $136.1 billion. "If the economy is stuck in a soft patch, the job market is stuck in the mud," said economist Oscar Gonzalez at John Hancock Financial Services. "The only good news is that the market is not getting dramatically worse. Still, if you're out of work, you're out of luck."

Taken together, Thursday's reports fostered hopes that the long-awaited post-war economic pick-up may be a bit nearer, but most economists were reluctant to celebrate yet. "Two of these indexes (Empire State survey and Philly Fed) does not make a full recovery. But it certainly is, along with other data we have seen recently, pointing in the right direction," said Tim O'Neill, chief economist at BMO Financial Group in Toronto. The Labor Department said first-time claims for state jobless benefits, a rough guide to the pace of U.S. layoffs, dropped by 13,000 to 421,000 in the June 14 week from a revised 434,000 the prior week. The claims number was lower than economists had expected, but some cited the worrying fact that claims have been stuck above 400,000 -- a level regarded as signaling labor market erosion -- for 18 weeks. "While this is an encouraging development, the latest reading is still high by historical standards, and the pace of unemployment insurance applications will need to decline further in order to signal a stabilization in labor market conditions," Jade Zelnik, economist at RBS Greenwich Capital, said in a report. In more upbeat news, the Conference Board said its index of leading indicators rose 1.0 percent in May, well ahead of the expectations of Wall Street economists, who had forecast a 0.6 percent rise. "The leading economic index finally points to a recovery almost a year and a half after the end of the recession," the board's chief economist, Ken Goldstein, said in a statement. "But dangers present in the first five months of the year have not disappeared completely. Chief among them is a lack of business confidence."

Economists polled by Reuters had expected the current account gap, the broadest measure of trade since it includes investment flows as well as goods and services, to come in at $141.2 billion. However, some analysts called the lower number was small consolation. "The current account deficit was smaller than expected but it's still a record," said Anne Parker-Mills, senior economist at Brown Brothers Harriman in New York. The growing deficit has weighed on the dollar in recent months. Many analysts believe the huge gap is unsustainable over the long run and raises the risk of a sharp correction and an even weaker dollar.
Source: Yahoo News

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