Best of the Week
Most Popular
1.Spain Ignores Scotland Lesson as Catalan Independence Referendum Could Spark Civil War - Nadeem_Walayat
2.Used Car Buying From UK Dealer Top Tips, CarMotion.co.uk Real Customer Experience - N_Walayat
3.Spanish New Civil War Begins as Madrid Regime Storm Troopers Quell Catalan Independence Rebellion - Nadeem_Walayat
4.Virgin Media Broadband Down, Catastrophic UK Wide Failure! - Nadeem_Walayat
5.Are the US Markets setting up for an Early October Surprise? - Chris_Vermeulen
6.The Pension Storm Is Coming To Europe—It May Be The End Of Europe As We Know It -John_Mauldin
7.Stock Market Crash 2018; Will it Prove to be Another Buying Opportunity - Sol_Palha
8.The Profoundly Personal Impact Of The National Debt On Our Retirements - Dan_Amerman
9.Stock Market as Good as it Gets; Like 2000 With a Twist -Gary_Tanashian
10.1987 Stock Market Crash 30th Anniversary Greatest Investing Lesson Learned - Nadeem_Walayat
Last 7 days
This Super Metal Is Set To Soar By 300% - 23rd Oct 17
More New Record Highs As S&P 500 Gets Closer To 2,600 Mark - 23rd Oct 17
Another Minor Stock Market Top? - 23rd Oct 17
Bitcoin Hits $6,000, $100 Billion Market Cap As Helicopter Ben and Jamie Demon Warn The End Is Near! - 22nd Oct 17
Time for Caution in Gold Miners - 22nd Oct 17
“Great Rotation” Ahead; Will it Be Inflationary or Deflationary? - 21st Oct 17
The Trigger for Volatility, Rates and the Next Crisis - 21st Oct 17
Perks to Consider an Agent for Auto Insurance - 21st Oct 17
Emerging Megatrends Hurting Consumers - 21st Oct 17
A Catalyst of the Stock Market Bubble Bust - 21st Oct 17
Silver Stocks Comatose - 21st Oct 17
Stock Investors Ignore What May Be The Biggest Policy Error In History - 20th Oct 17
Gold Up 74% Since Last Stock Market Peak 10 Years Ago - 20th Oct 17
Labour Sheffield City Council Employs Army of Spy's to Track Down Tree Campaigners / Felling's Watchers - 20th Oct 17
Stock Market Calm Before The Storm - 20th Oct 17
GOLD Price Creates Bullish Higher Low - 20th Oct 17
Here’s the US’s Biggest Vulnerability in NAFTA Negotiations - 20th Oct 17
The Greatest Investing Lesson Learned from the 1987 Stock Market Crash - 20th Oct 17
Stock Market Time to Go All-in. Short, That Is - 19th Oct 17
How Gold Bullion Protects From Conflict And War - 19th Oct 17
Stock Market Super Cycle Wave C May Have Started - 19th Oct 17
Negative Expectations, Will the Stock Market Correct? - 19th Oct 17
Knowing the Factors Affect your Car Insurance Premium - 19th Oct 17
Getting Your Feet Wet In Crypto Currencies - 19th Oct 17
10 Years Ago Today a Stocks Bear Market Started - 19th Oct 17
1987 Stock Market Crash 30th Anniversary Greatest Investing Lesson Learned - 19th Oct 17
Virgin Media Broadband Down, Catastrophic UK Wide Failure! - 19th Oct 17
The Passive Investing Bubble May Trigger A Massive Exodus from Stocks - 18th Oct 17
Gold Is In A Dangerous Spot - 18th Oct 17
History Says Global Debt Levels Will Lead to Another Crisis - 18th Oct 17
Deflation Basics Series: The Quantity Theory of Money - 18th Oct 17
Attractive European Countries for Foreign Investors - 18th Oct 17
Financial Transcription Services – What investors should know about them - 18th Oct 17
Brexit UK Vulnerable As Gold Bar Exports Distort UK Trade Figures - 18th Oct 17
Surge in UK Race Hate Crimes, Micro-Racism, Sheffield, Millhouses Park, Black on Asian - 18th Oct 17
Comfortably Numb: Surviving the Assault on Silver - 17th Oct 17
Are Amey Street Tree Felling's Devaluing Sheffield House Prices? - 17th Oct 17
12 Real-Life Techniques That Will Make You a Better Trader Now - 17th Oct 17
Warren Buffett Predicting Dow One Million - Being Bold Or Overly Cautious? - 17th Oct 17
Globalization is Poverty - 17th Oct 17
Boomers Are Not Saving Enough for Retirement, Neither Is the Government - 16th Oct 17
Stock Market Trading Dow Theory - 16th Oct 17
Stocks Slightly Higher as They Set New Record Highs - 16th Oct 17
Why is Big Data is so Important for Casino Player Acquisition and Retention - 16th Oct 17
How Investors Can Play The Bitcoin Boom - 16th Oct 17
Who Will Be the Next Fed Chief - And Why It Matters  - 16th Oct 17
Stock Market Only Minor Top Ahead - 16th Oct 17
Precious Metals Sector is on Major Buy Signal - 16th Oct 17
Really Bad Ideas - The Fed Should Have And Defend An Inflation Target - 16th Oct 17
The Bullish Chartology for Gold - 15th Oct 17
Wikileaks Mocking US Government Over Bitcoin Shows Why There Is No Stopping Bitcoin - 15th Oct 17
How to Wipe Out Puerto Rico's Debt Without Hurting Bondholders - 15th Oct 17
Gold And Silver – Think Prices Are Manipulated? Look In The Mirror! - 15th Oct 17

Market Oracle FREE Newsletter

3 Videos + 8 Charts = Opportunities You Need to See - Free

The Rest of the World is going to Rejuvenate the US Economy?

Economics / UK Economy May 14, 2007 - 09:07 PM GMT

By: Paul_L_Kasriel

Economics The “core” U.S. economy is doing fine. That is, if you exclude consumer spending, business capital goods spending and housing – almost 85% of U.S. real GDP – the outlook is rosy inasmuch as exports will surely surge because of the strong economic growth in the rest of the world. Other than the fact that exports are only about 11-1/2% of real GDP, a record high, there are other problems with depending on the rest of the world to be America's economic locomotive.


For starters, a lot of the economic growth in the rest of the world is being generated by the rest of the world's exports . Charts 1, 2 and 3 show the recent behavior of domestic demand relative to GDP for the economies of the European Union, Japan and China. As can be seen, domestic demand is flagging relative to total GDP, implying that exports are the marginal factor of strength in the rest of the world's economic growth. U.S. consumer spending amounts to 29% of the rest of the world's GDP. With U.S. households and businesses starting to slow their spending, the export sectors of the rest of the world will slow. In other words, U.S. domestic demand in recent years has been the economic locomotive for the rest of the world. Now that the locomotive is stalling, is the caboose going to cause the locomotive to re-accelerate? 

Chart 1

Chart 2

Chart 3

By the way, the engineers on the caboose are now applying the brakes. In case you missed it, the Bank of England raised its monetary policy interest rate last week, the European Central Bank will raise its policy rate next month, the Bank of Japan has hinted that it will raise its policy rate again in the not-too-distant future and the People's Bank of China has been busy raising the reserve requirements of its constituent banks. So, about the time that the rest of the world's exports start to feel the negative effects of the slowdown in U.S. consumer and business spending, the rest of the world's domestic demand will also feel the negative effects of central bank tightening.

As if the Commerce Department's first guess at first-quarter annualized real GDP growth of 1.3% were not disheartening enough, its second guess is likely to be even more disheartening. With the release of March data for our trade deficit and business inventories, it now looks as though first-quarter real GDP growth will be revised down to about 0.8% – that's annualized . Now some Pollyannas out there are saying that because part of the expected downward revision to first-quarter GDP is due to lower inventories, the stage is set for a second-quarter production snapback. Dream on. The downward revision to inventories was in the retail sector. Real retail sales fell in both March and April. So, with households finally cutting back on their spending, are merchants going to be in a hurry to restock their shelves?

Speaking of households, even though they are cutting back on their real spending, they seem to be tapping their credit cards more now that their home ATMs are draining – i.e., home equity growth is slowing – and mortgage lenders are requiring more than a pulse to qualify for a loan. Chart 4 speaks to this point. Is this an act of desperation?

Chart 4

The May Blue Chip Economic Forecasters Survey consensus has real GDP growing at 2.3% in 2007 on a Q4/Q4 basis. (We submitted a forecast of 1.9% growth.) Historically, how has the Fed reacted to several quarters of real GDP growth of 2.3% or lower? Chart 5 holds the answer. In Chart 5 the bars below the horizontal line represent year-over-year real GDP growth less than 2.3%. The shaded areas represent periods of recession. Chart 5 shows that every time real GDP growth has slowed close to 2.3% or below, the Fed has allowed the federal funds rate to decline.

To be sure, most of the time real GDP growth has slowed to 2.3%, it has gone on to actually contract – i.e., a recession has occurred. But not always. In the second and fourth quarters of 1995 real GDP growth slipped below 2.3%, the Fed cut the federal funds rate and the economy did not enter a recession. In 1967, real GDP growth approached 2.3%, the Fed cut the federal funds rate and the economy avoided a recession. Of course in 1998 the Fed cut the federal funds rate with real GDP growth well above 2.3% out of fear that Long Term Capital Management's liquidity problems might become systemic. So, if history is any guide, the Fed will start cutting the federal funds rate later this year. 

Chart 5

But you certainly don't get the impression the Federal Open Market Committee (FOMC), the policy arm of the Fed, is contemplating an interest rate cut. At its past two meetings, the FOMC has said that inflation remains its “predominant policy concern.” If a central bank is predominantly concerned about inflation, it does not cut interest rates. But the FOMC has been known to change its mind quickly. For example, in March 1995 the FOMC was on hold, but had a bias toward raising the federal funds rate. The next time it met, the FOMC became agnostic with regard to the likely direction of its next fed funds rate move. Then in early July 1995, the FOMC cut the funds rate by 25 basis points. In November 2000, the FOMC was still biased toward a funds rate hike. In December, it was biased toward cutting the funds rate. And on January 3, 2001, in an unscheduled telephone meeting, the FOMC cut the fed funds rate by 50 basis points. Now, of course, this is a different FOMC and every business cycle is different.

So, this FOMC may decide for various reasons that the U.S. economy needs a “cleansing” recession later this year or early next. If the FOMC does not cut the funds rate early in the second half, we think it will get a recession. But our base case is that a combination of weak real economic growth, a rising unemployment rate and moderating core inflation will move the FOMC to begin cutting the fed funds rate at its August 7 th meeting and, with much luck, the economy might avoid a recession later this year or early next a la 1995.

*Paul Kasriel is the recipient of the 2006 Lawrence R. Klein Award for Blue Chip Forecasting Accuracy

SELECTED BUSINESS INDICATORS

Table 1 US GDP, Inflation, and Unemployment Rate

Table 2 Outlook for Interest Rates

By Paul L. Kasriel
The Northern Trust Company
Economic Research Department - Daily Global Commentary

Copyright © 2007 Paul Kasriel
Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.


© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife