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Monday, August 18, 2003

Back on the Blog 2: This Time for Real

Hans (in the mailbox) asked me whether I was in Provence because it wasn't hot enough for me in Barcelona. Turning the phrase round I would prefer to say that I am back in Barcelona since it wasn't hot enough for me in Provence. At least that's what it feels like. One way or another, one thing is sure: this summer it's hot, and a lot hotter than I can remember recently. This notwithstanding the fact that yesterday it rained heavily here, and rain always freshens the air and clears up all that pollution a bit.

Talking about this puts me in mind of the Harry Truman thing about "If you can't stand the heat, get out of the kitchen" (and sure, cooking at this time of year is something of a problem) because looking at the economics press it does look like things are about to start getting pretty hot for me in every sense. Everyone (except Brad, except Stephen Roach, except (perhaps) Paul Krugman, except........) seems utterly convinced that the US recovery is well underway. I still beg to differ. It's not that I don't believe the numbers, some things have clearly improved. The problem is simply whether this is sustainable. My justification for this posture has been repeated so many times that even I am getting bored with it: Europe and Japan are effectively down (or at best flat - demographic thesis), the US is better placed being both more immigrant friendly and having made better use of the productivity gains to be found in the ICT revolution, but, the US economy has important structural problems. In particular it is effectively exporting jobs through outsourcing without having discovered a new 'winning' sector which can replace the traditional industrial one to pay for the imports, and so it has an important trade deficit. Services, which now constitute over 70% of the US economy are largely non-tradeable, and even where they become so (accounting, medical records, customer support, routine software........) as Stephen Roach has indicated, they become liable to global outsourcing.

Normally, as Roach also suggests, the answer to this would be a currency 'correction', but it is precisely here that we find the structural problem of Europe and Japan. Neither the euro nor the yen are in any position to accept the load that this correction implies, and the Chinese yuan is neither ready or willing to do so. In this context Andy Xie is surely right, the Chinese government should use China's relatively favourable economic situation to address the parlous state of its banking and financial system. So, in a growth starved world, eyes turn to the US as consumer of last resort, and to the dollar as the best currency in what is effectively a bad lot. The result: a US economy which is capable of generating substantial productivity gains whilst not generating any substantial increase in employment and business investment. Hence the economy grows more slowly than it's capacity, hence the output gap, and hence the doubts about sustainability. So, to end with another Truman wonder, 'the buck stops here'.

The dollar may rise in Asia as traders and economists speculate that reports this week will add to evidence U.S. economic growth is accelerating. An index of leading U.S. economic indicators probably rose for a fourth month in July and home construction held near the strongest pace in 17 years, reports this week will probably show, based on surveys of economists by Bloomberg News.

The dollar traded at $1.1243 per euro at 9:55 a.m. in Tokyo from $1.1265 late Friday in New York. The U.S. currency was little changed at 119.21 yen. The University of Michigan's consumer sentiment, which was delayed to tomorrow from Friday because of power failures in New York and parts of the Midwest, may rise in August to 91.5 from 90.9, based on the median of 53 forecasts in a Bloomberg News survey. "There's evidence the U.S. economy is growing faster than Europe and Japan, making it easier for the dollar to rise,'' said Minoru Shioiri, senior manager of the treasury and foreign exchange division in Tokyo at Mitsubishi Securities Co., the brokerage unit of Japan's third-biggest bank. Shioiri has bought dollars against the euro, expecting the U.S. currency to rise to $1.1050 per euro by the end of this month.

The Conference Board's gauge of how the economy will perform over the next three to six months is expected to rise 0.4 percent for last month, according to the median of 39 estimates in a Bloomberg News survey. Construction companies broke ground on 1.79 million new homes at an annual pace in July, the Commerce Department is expected to report tomorrow, according to the median of 45 forecasts. The 1.705 million homes started in 2002 were the most since 1986.
Source: Bloomberg

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