Posted on 12/17/2005 11:47:35 AM PST by SirLinksalot
Can America keep it up?
Dec 14th 2005
From The Economist Global Agenda
As the Federal Reserve raises interest rates again and the trade deficit breaks another record, the American economy continues to confound the sceptics. Thanks for that go largely to resilient consumers and booming productivity
FOR several years now, economists have been watching American consumers with the same mixture of astonishment and anticipation that wide-eyed fans bring to endurance sports: amazing that they’ve made it so far, but how much longer can they go on like this? Strong consumer spending has underpinned America’s robust economic expansion, even as most other industrialised countries have struggled to get their economies back on track. But consumers have been running down savings to sustain this level of spending; the personal savings rate has actually been negative since June. Booming house prices and low interest rates have enabled consumers to take on more debt without suffering much, but with interest rates now climbing, Americans have begun to feel the pinch. Data from the Federal Reserve show that the percentage of household disposable income devoted to servicing debt was a record 16.6% in the third quarter.
Yet the consumers soldier on. Figures released by the Census Bureau on Tuesday December 13th show that retail sales in November, when the Christmas shopping season starts, were up by 0.3% from October, and 6.3% higher than a year earlier. And on Wednesday, the Department of Commerce announced that imports of oil, cars and consumer goods caused the already gaping trade deficit to balloon even further in October, to a record $68.9 billion (see chart). This surprised economists, who had been expecting the deficit to fall slightly as oil prices subsided from their September highs.
It seems unlikely that consumers will have the stamina to keep this up much longer. While petrol prices have fallen back, crude oil is still trading above $60 a barrel, pinching the pockets of fuel-guzzling Americans. Long-term interest rates are currently kept low by foreign central banks buying dollars—and dollar-denominated assets—to keep their currencies cheap. But those mountains of dollars are creating ever bigger problems for the banks, which may have to cut back soon. That would bring on a sharp increase in American interest rates, which in turn would deflate the housing bubble—if it doesn’t shrivel on its own first. There is growing evidence that this may be happening already.
Economists have long been warning of these risks. But someone plainly forgot to tell the economy that it was supposed to be in trouble. According to figures released earlier this month, GDP grew at an annualised rate of 4.3% in the third quarter, revised upward from a preliminary estimate of 3.8% issued in November. That is despite the ravages wrought by hurricanes in August and September, which not only destroyed a major port city but closed down a big chunk of the energy industry.
Better still, last week the Department of Labour reported that over the same period, productivity had grown by 4.7%. And payrolls, which barely grew at all in September and October, finally posted a respectable 215,000 new jobs in November. Little surprise, then, that George Bush is once again talking up the economic data, and seeking to claim some of the credit for his policies, particularly tax cuts.
Sadly for Mr Bush, it appears someone also forgot to tell the voters that the economy is doing well. Polls show approval ratings for the economy on a par with the rest of his dismal numbers. Employment has generally lagged behind the economy. Payroll employment troughed in May 2003, 18 months after the recession ended. Since then, the economy has added 4.5m jobs—and unemployment currently hovers around 5%. But wage growth has been sluggish, implying a soft jobs market.
The economy is also posing some difficult questions for the Fed, whose monetary-policy committee met on Tuesday. The central bank has steadily raised short-term interest rates over the past year and a half to fight off inflation. But where does it want to stop? As expected, the Tuesday meeting delivered another 25 basis-point increase in the benchmark interest rate, to 4.25%, but the language of the accompanying statement contained both hawkish and dovish signals. Unlike previous statements, there was no mention of “accommodation”, suggesting that the Fed considers monetary policy to be close to neutral, and will stop tightening soon. But strong wording also indicated that at least one or two more rate increases can be expected before the cycle turns. Nonetheless, the dollar dropped on the news, a decline that grew steeper after Wednesday’s trade figures.
High oil prices may not have translated into slower economic growth yet, but they are creating inflation, which ran well above 4% in September and October. On the other hand, core inflation, which excludes volatile energy and food prices, is still relatively modest. With gasoline dropping back to $2.19 a gallon from nearly $3 in September, fears that high oil prices will feed through into the broader price index have eased. And the stellar productivity figures increase the pace at which the economy can grow without fuelling inflation.
Ben Bernanke, the incoming Fed chairman, will want to be tough, to prove to financial markets that he is serious about keeping prices stable. But if current trends continue, he will not have to be so tough that he causes serious economic pain. Those economists may continue to be astonished for quite some time.
Here's mine
UNEMPLOYMENT : 4.8%
GDP GROWTH : 3.6%
BUDGET DEFICIT : DOWN to $300 Bilion
CONSUMER CONFIDENCE : UP
HOUSING : FLAT
OIL PRICES : BELOW $55/Barrel
Anyone disagree ?
Until the Congress screws it up.
Until the Democrats regain control of the House.
I suspect consumer confidence will be flat. Otherwise your predictions look pretty good.
If I had to take the over/under on unemployment, I'd take the over, though not by much. I'd probably expect 4.9-5.0 instead. The only way I would expect unemployment under 4.8 is if illegal immigrant worker legislation now working through Congress actually stops the influx of migrant workers.
Keep in mind, though, that by mid 2006, the mainstream media will be doing their level best to make any good news look bad. So even hitting these targets may not help the Republicans in that election.
A couple more:
Republicans gain in mid-term elections
Iraq successfully controls their country and troops begin withdrawing.
DOW breaks 11k and stays there.
Democrats continue to lie, undermine, and slander Bush and our military.
I just thought of another joker in the deck on unemployment. At some point, the federal government is going to have to change its methodology on measuring unemployment to account for the increasing number of self-employed workers.
Almost everyone thinks they are being under-counted right now. The fact that they are doing well is one of the factors driving good consumer confidence and spending.
Unfortunately, this being the government, there's no way to predict what kind of screwy way they'll end up measuring self-employment. So there's no way to predict the impact on unemployment numbers. The numbers ought to go down, but...
Congress and W have been trying their best. Spending billions on crappy domestic programs, giving third world countries trillions over the years to nations that hate our guts.
"From The Economist Global Agenda"
Well, that says a lot right there...
They're just upset that the USA isn't in the same economic doldrums as the EU.
Budget deficit of $600 billion. Trade deficit of $800 billion. Oil hits $80. Gold hits $600. Inflation at 8%. GDP overstated due to manipulated CPI numbers.
As long as liberalism is in decline this economy will last. Note the death of communism in the United States and the world. Use this as your barometer.
But...but...I thought the economy was sputtering...the poor were suffering...
BINGO!
How hard can it be? The IRS knows. You have to use self employed business tax forms.
The only way I would expect unemployment under 4.8 is if illegal immigrant worker legislation now working through Congress actually stops the influx of migrant workers. >>>>>>>
Maybe I know now why the picture looks so much worse where I live, I heard an announcement on televison yesterday that while South Carolina had added 30,000 jobs during whatever period they were discussing that 180,000 more people had entered the work force during the same period, they attributed it to people moving into the state.
I suggest you become familiar with a concept called "cash". It allows a lot of things to happen that the IRS never finds out about.
"Nonetheless, the dollar dropped on the news, a decline that grew steeper after Wednesday’s trade figures."
Which will fuel more buying of US government debt, by China and Japan, primarily, which will in turn keep long term interest rates down, despite efforts by Greenspan, and soon Bernanke, to the contrary.
The Fed mechanism for controlling, or attempting to control, certain rates isn't working any more. So, we'll be finding out, if cheap money alone is what drives high appreciation in residential real estate. I don't think it is, due to reported softness in many of the previously "hot" markets, even with 30 year mortgages still hovering at or slightly below 6%. Of course, the really cheap money was I/O ARMs, which have increased far more than conventional, so who really knows at this point.
Time will tell.
The unemployment rate is calculated by the BLS through the Current Population Survey, also known as the Household Survey.
It is an in-depth and scientific survey of 60,000 households each month.
I don't see how self-employment would lag on this.
Payroll employment numbers come from the Establishment Survey (CES) this is one that meets criticism that it might miss the self-employed because it is mainly a survey of businesses.
The two surveys are unrelated.
Whoever could "someone" refer to???
Perhaps my information is obsolete, by my understanding is that the questions they ask are slanted towards measuring jobs in traditional organizations. It's not easy to tell the difference between someone who is truly self-employed, and someone who is doing fill-in work while being actually unemployed and searching for a job.
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