Posts Tagged ‘us economy’

file0001742232424The UK economy grew by 0.7 per cent in the second quarter of 2015, and by 2.6 per cent over the past year. The US economy grew at an annualised pace of 2.3 per cent. The media and markets greeted the figures with relief, but they were wrong.

To understand why, first consider what things were like in the first quarter of this year. The UK grew by 0.4 per cent, that’s quarter on quarter, and the US grew by 0.6 per cent– annualised. Actually, the data for Q2 had been revised upwards, so the markets had a kind of double celebration. They were chuffed by the okay figures for Q2, and even more chuffed by the upwards revision for Q1. Even so, bear in mind that in the latest quarter both the UK and US economies grew at a rate that was still way below average. As for Q1, the data may say that the US grew by 0.6 per cent annualised in Q1, but frankly that is a pretty awful performance. It’s just not as awful as the figures originally suggested. It is like coming last in a race, and then celebrating because the judges discovered they had made a mistake and in fact you only came second from last.

History tells us that economies tend to enjoy a period of above average growth when coming out of recession. History tells us that when an economy suffers a one off shock, which is supposed to have been what happened in Q1 of this year, then the following quarter should expand at a faster than normal pace to make up for the lost production of the previous quarter.

We are told that poor figures on the first quarter were down to a shockingly bad winter in the northeast corner of the US. This even affected US imports to the UK, knocking the UK economy. If that is so, however, shouldn’t the second quarter have seen unusually fast expansion, making up for lost ground?

In the US, the Federal Reserve is losing patience, it will be a big surprise if US interest rates don’t go up very soon, September most likely. Rates will be rising in the UK soon too, probably January.

Once again, consider the lesson of history. The Fed increased rates in 1994, after a period in which they had been at 3 per cent for 18 months or so. A year and a half later, US interest rates were at 6 per cent. Crisis soon followed, however. The global economy had got used to low US interest rates, when they rose capital left developing markets and headed west. We had the Asian crisis of 1997 and the Russian crisis of 1998. The global banking system tottered.

A similar story occurred all over again the following decade. This time though, US rates were cut to 1 per cent, stayed there for about a year, and then gradually began to rise. Within a year or two, come 2008, the global banking system did more than totter, it fell over. We all know how nasty that was.

This time US rates have been at near zero per cent for almost seven years. As they rise, the shockwaves across the world will be nasty.

The problem is compounded. Critics of the Fed say that by cutting interest rate to near zero, it has nothing left to give in the event things make a turn for the worse. The snag with that is that if the Fed hadn’t cut rates so low its economy may have suffered an even more nasty turnaround. It is like a runner in a race, holding back for a sprint finish. But if the race leader sets a fast pace, and our runner goes with the leader and has the sprint run out of him, or indeed her. You can’t criticise the runner for going too fast, there was no choice.

In short, rates are low because they had to be, now they are rising because they have to. Neither the US or UK economy are strong though, indeed they are more like a wheezy athlete, about to start a long uphill climb.

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You don’t need to look far. The Internet is full of stories proclaiming doom. The US, they say, is on a one way street to financial ruin. Well it appears they are wrong. And if even if you could say that at a pinch there is a kind of one way street to debt hell, the street is very, very long, and it would not be hard to construct a diversion, and furthermore, we have plenty of time to do it.

Oh woe is us! Or is that woe is the US? And since the US will remain the most important advanced economy as far into the future as we can possibly predict, maybe the US and us is kind of the same thing.

At the end of 2011 US total liabilities were worth 741 per cent of GDP. Foreign holdings of US debt are currently worth around 60 per cent of US GDP – a big chunk of that is owned by China. The level is rising too. And then there is the so called elephant in the room – healthcare costs.

Estimates suggested that the net present value of unfunded US liability for US healthcare is $42.8 trillion, and $20.5 trillion for social security. Last November the ‘Wall Street Journal’ ran an article by Chris Cox and Bill Archer arguing that the true liabilities of the US government are nearer 500 per cent of GDP.

These are scary numbers. It is just that they are seriously misleading.

Take a look at any plan. It could be a business plan, a plan for funding retirement, a plan for a holiday or buying a house, or one for emigrating. And then ignore all the good news, all the promise. Quelle surprise the plan that is left does not look very attractive. Those who say the US is bust are applying similar logic.

According to Capital Economics, if you take into account the assets owned by the US, including equities, property, assets abroad, and indeed US infrastructure owned by the US government you are not left with net debt at all. In fact, the US has a net worth of around 550 per cent of GDP. Capital Economics calculates that the net worth of US households is 408 per cent of GDP, for non-financial businesses it is 118 per cent of GDP, for the financial sector it is 36 per cent of GDP, and minus 13 per cent of the US Government.

Bear in mind that this balance sheet applies at a moment that has succeeded a crash in US house prices. By historical standards US house prices look cheap.

Sure, the US has owns money abroad. But then again, the US also owns foreign assets. You can’t count US debt, but ignore money owed to the US. Take the full story into account, and net US foreign debt is about 30 per cent of GDP, less than a quarter of Greece’s external liabilities.

Besides, the US tends to enjoy much higher returns from the money owing to it, than it pays out on money owing abroad. This is largely because much of US debt held by foreigner is in the form of very low risk, low yielding government bonds.

Then there are heathcare and social security costs. In calculating the net current value of these costs, the doomsayers have looked at 75 year actuarial projections. As Capital Economics said, “Why stop at 75-year projections? Why not keep going for 100 years so the debt runs into the hundreds of trillions?”

In calculating the net current value of healthcare costs, the doomsayers have assumed costs will continue to grow at a much faster rate than GDP, and have built in assumptions about what the US economy will look like between 2040 and 2090.

Even if their assumptions are right – and it will be one very lucky guess if they are – the US has plenty of time to implement measures to address this, such as raising the retirement age, or upping taxes.

So here is the real shock. If the US carries on the way its critics predict, maybe at some point in the next 30 years it will have to see a rise in the retirement age and some kind of VAT.

Of course, there is something missing from all these guesses. Forget about the lone elephant in the room; there is a herd of mammoths, and it is technology. How anyone can start making sensible guesses as to what the US will look like in 60 years’ time, without taking into account the possible changes technology may bring is something of a puzzle.

©2013 Investment and Business News.

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The FTSE 100 finished Monday 11 March at 6503. That was a five year high, just 217 points off a decade high (set 31 October 2007), and 426 points off an all-time high (set 30 December 1999).

As an aside, it is quite interesting to note that the FTSE 100 decade high occurred after the run on Northern Rock. I find it hard to imagine  what madness possessed the markets to show such exuberance when the signs of problems ahead had been writ large on the wall.

The question is: are the markets mad this time, too?

The news from the UK is not very good. But then there is this thing called the global economy, and perhaps what really counts is how the rest of the world is doing. Besides the FTSE 100 is not really a bellwether of the UK at all; after all, many of the companies listed on this index do most of their trading abroad.

The news from our two biggest trading partners is okay. In the US, annualised GDP was a tiny 0.1 per cent in the final quarter of last year, but there are reasons for believing this was a one off, and the poor performance was mainly explained by falling inventories and cuts in defence spending. Other data is far more promising.

The latest US Consumer Confidence Index from the Conference Board was 69.6. Okay that was down from the heady heights of 73.1 seen in October when the index hit a near five year high, but not a lot down. More to the point, the index rose sharply on the month before.

US Consumer Confidence

The latest Purchasing Managers’ Indices (PMIs) are promising too. The index tracking non-manufacturing hit a 12 month high, and the index for non-manufacturing rose to a two year high.

Finally, the news on US jobs is promising, with February seeing an increase of 236,000 non-farm jobs. In fact, the US unemployment rate fell to 7.7 per cent, which is the lowest level since George Dubya and Dick ruled the roost at Capitol Hill.

All in all then the data coming out of the US, is not bad. Sure you can be cynical, and say it won’t last or the US is built on a bubble, but the US does at least provide a rationale for surging stock markets.

The news out of our second largest trading partner is not quite so good, but it is still all right. The Germany economy contracted in the final quarter of last year, but the various surveys including PMIs (the Germany composite was 53.3 in February), Zew index and German IFO all point to a much better performance in Q1.

Next on the list of main exports markets is the Netherlands. The Dutch economy contracted by 0.2 per cent in Q4 last year after contracting 1 per cent in the quarter before.

But it is when we look a little further down that things are looking worrying. Our fourth largest export market is France. The French economy contracted by 0.3 per cent in Q4, a smaller contraction than Germany. But, unlike Germany, the latest Purchasing Managers’ Index was bad; at 43.1 it pointed to the contraction continuing, and the latest data on French industrial production showed a 1.2 per cent contraction.

More worrying still, our seventh largest export market is China, and things have turned for the worse. UK exports to the economy on the other side of the Great Wall have risen eight times since 2000. Earlier this year it appeared as though China was over the worst and on the mend. Not so says the latest data: growth in both industrial production and retail sales in the year to January  and February was down on the year to December. Investment into bubble areas, such as property and infrastructure is still surging, but investment into other areas, which can create sustainable growth, is not.

Markets may be riding a tide of euphoria.

But the tide may yet go into reverse.

©2012 Investment and Business News.

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The economic news came in four packets.

Packet number one was US consumer confidence. The latest index produced by the Conference Board fell to a 14 month low. It is hard to see how this is anything but disappointing. Three months ago it was a different story. The index had risen to nearly a five year high. “Great,” said the markets, “these indices are important,” and then they bought. Last week, on news that the index had reverted back to the levels last seen at the end of 2011, markets said: “Well, these consumer confidence indices don’t have much meaning.”

Packet number two: the US economy contracted in Q4 last year, or at least that’s what the not always reliable data said. The contraction was modest, just 0.1 per cent, but even so, when the stats say the economy is moving backwards, economic commentators usually look a little alarmed. Not so this time. “It was down to one offs,” they said. “US defence spending fell, inventories fell; these things will be not repeated. Q1 2013 will be better.”

The one positive aspect of the GDP data was news that consumer spending rose sharply, and why was that? It appears that an increase in company dividends, as companies fretted about tax changes and chose to make payments before the changes came into force, put money into consumers’ pockets.

So to recap: US GDP was down, but we were told it was down to one-offs. Consumer spending was up, thanks to one-offs. If consumer confidence indices are to be believed, consumer spending will fall in the months ahead, yet the markets ignored that bit.

Packet number three: the latest Purchasing Managers’ Index (PMI) for US manufacturing was a bit better. These PMIs are important. Any score over 50 is meant to suggest growth. Back in November the index was down at 49.9. In December it was up at 50.2, but still perilously close to the 50 no change mark. But in January the index surged, hitting 53.1, which was a one year high.

So whilst the consumer confidence index and GDP data was disappointing, the PMIs were good.

Packet number four: data on US jobs. January saw another 157,000 US workers in non-farming jobs join the employed. Non-farm payrolls have now seen increases in excess of 150,000 every month for six months. Furthermore, the data for November and December was revised upwards, and by quite a bit too – up 127,000 in fact.

But despite all this, US unemployment rose from 7.8 to 7.9 per cent.

So the news on US jobs is good, but doubts linger. In particular, critics are saying that too many of the jobs being created are part-time.

So that’s the economic news. You will no doubt agree, it was ambiguous. Good in some respects, worrisome in others.

The markets reacted by buying. In fact, at the end of last week the Dow closed at over 14,000 for the first time since 2007. At close of play last week, the Dow stood at 14,009. The index’s all-time highest closing price was set on 9 October 2007 with a reading of 14,164. In other words, we are very close to seeing the Dow break into new territory.

Have the markets correctly priced-in recovery, or have they been infected with irrational euphoria?

©2012 Investment and Business News.

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The hurricane delayed things. The latest report on US consumer confidence was due on Tuesday, but in the end it had to wait until Thursday. When it saw the light of day, the news was good.

Last month US consumer confidence, according to the Conference Board, hit its highest level since February 2008. If these things interest you, the index hit 72.2.

Actually, QE may have something to do with it. When the Fed goes out and buys bonds via quantitative easing, it forces up bond prices. As a result, equity prices rise (probably) and house prices stop crashing (maybe).  US consumers like it when their equity holdings rise in value, hence the jump in their confidence.

But there was more good news from the US. The latest Purchasing Managers’ Index (PMI) from ISM was out yesterday too, and while it was not exactly the stuff that runaway booms are made of, it wasn’t half bad either. In fact the headline index rose to 51.7, from 51.5 in September and 49.5 in August. Okay, they’re just numbers.  “How are you feeling today?” “Today I feel three?” It makes no sense. Consumers’ confidence is 72.2, manufacturers’ 51.7. You might ask 51.7 what? Wishes perhaps?

But it’s the history that makes these numbers mean something. For the PMI, any score over 50 is meant to suggest growth, and the reading for October was the highest score since May.

This evening (2 November) the latest US jobs report will be out. The last one had US unemployment falling to 7.8 per cent, pretty much back to the level it occupied when George Dubya and Dick Cheney moved out of the White House.  (And someone called Obama moved in). If the data is good, Barack will surely be chuffed.

Not that he must look too chuffed. It does seem as though the world is divided into three. Those who think Barack gets pushed around, does not speak up for himself, and needs to do the political equivalent of punching Mitt Romney on the nose. Then there are those who say he looks Presidential and rises above that kind of nastiness. Then there are those who just don’t like him.

Returning to the US economy, house prices may be the key. Back in 2006 residential investment as a share of US GDP was 6 per cent. In 2012 it stood at just 2 per cent. No wonder Uncle Sam lost a shed load of jobs.

Of course, the fall in US house prices mattered for two other reasons. As prices fell, consumers lost confidence (and by the way in July 2007 the US consumer confidence index passed 110), and it mattered for another reason.

What was it now? Thinking…

Oh yes, that’s right, it led to the subprime debacle, followed by a global banking crisis.

According to Keith Wade, Chief Economist at Schroders: “The number of residential properties in negative equity at the end of the second quarter was 10.8 million (22.3 per cent), down from 11.4 million (23.7 per cent) at the end of the first quarter….around 1.3 million households have moved out of negative equity since the beginning of 2012, although 2.3 million remain in ‘near-negative’ equity (less than 5 per cent equity in the property). For these homeowners the incentive is to pay down debt before looking to borrow again.”

The truth is that US house prices have been rising of late – not much, but the downward trend seems to have reversed. Mr Wade put it down to QE. He said: “Whilst QE may not be stimulating stronger borrowing, it is helping to drive investors out of low yielding cash and bonds and into higher yielding assets such as property.”

Meanwhile, devastating though Hurricane Sandy was, at least America seems to be waking up to the reality that there is something odd going on with the climate. Who knows for sure whether the storm was down to climate change, but there has to be a chance. New York Mayor Michael Bloomberg reckons there is a connection, hence his Road to Damascus type of conversion to back Obama for the election.

But moving away from the US economy, while Sandy might have given a shock to climate change sceptics, the ‘Daily Mail’ recently ran a piece rubbishing the whole idea of manmade climate change. Apparently global temperatures have not risen since 1997. Except of course, the data was distorted by an El Nino at the beginning of the period in question and La Nina at the end of the period. Strip out the effects from the El Nino and La Nina from the data, and in fact global temperatures have very much been on an upwards trajectory since 1997. Anyway, talking about rubbish, here is a link to the ‘Daily Mail’ article, see: Global warming stopped 16 years ago, reveals Met Office report quietly released… and here is the chart to prove it

And here is a rebuttal from the Met office:

The ‘Mail’ makes the case for some kind of censorship of the press in pretty impressive fashion.

And finally, here is a piece by yours truly covering a rather shocking idea to put forward by Martin Wolf at the ‘FT’. He has suggested that the Bank of England needs to start buying foreign bonds so that sterling will tumble in value. See: Is it time the Bank of England started buying foreign debt?

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

These words were recently spoken by Thomas L Hungerford of the US Congressional Research Service. He said: “The top [US] income tax rates have changed considerably since the end of World War II. Throughout the late-1940s and 1950s, the top marginal tax rate was typically above 90 per cent; today it is 35 per cent. Additionally, the top capital gains tax rate was 25 per cent in the 1950s and 1960s, 35 per cent in the 1970s; today it is 15 per cent. The average tax rate faced by the top 0.01 per cent of taxpayers was above 40 per cent until the mid-1980s; today it is below 25 per cent. Tax rates affecting taxpayers at the top of the income distribution are currently at their lowest levels since the end of the second World War.”

In other words, US taxes right now are pretty much near their post war low. And yet, what do certain US politicians say the cause of all their woe is? Why, taxes are too high of course.

So the big idea is to get the US economy moving and reduce government debt by cutting taxes.

The problem right now is that new technology doesn’t require that much labour. Take the new iPhone.  Setting aside problems with its mapping software, this looks set to be the most successful product launch ever. Apple itself is a major contributor to the US economy, except it doesn’t employ that many staff.

According to a study by Analysis Group, Apple has created no less than 304,000 jobs across the US. That’s impressive indeed. Yet Wal Mart, which in terms of market cap is worth only slightly over a third of Apple, employs 2.1 million Americans. Here is the irony: the report produced by Analysis Group was meant to be promoting the importance of Apple to the US economy. See Apple’s own web site creating new jobs through innovation 

The truth is that the Luddites have a point. Yes, new technology destroys then creates jobs, but it is much harder to see how really new technology can create more jobs than it destroys.

Some say 3D printing will hand the manufacturing advantage back to the West, as manufacturing is done increasingly by machines, which require highly educated workers to operate them. And let’s face it, 3D printing is automation in its most extreme form, and requires a good deal of skill to understand, and use.

But nanotechnology may have an even more extreme effect on job creation.

One of the effects of new technology is to reward those who understand it and can operate it very well indeed. For those who can’t, wages will be significantly lower.

It is possible that the result of new technology will be a widening in the gap between the very rich and the rest.

At the same time advances in prosthetics, and genetics research, is creating extraordinary opportunities in the world of medicine. But unless the wealth generated by new technology trickles down and benefits everyone, very few people will be able to afford this new medicine.

For the majority of people future jobs will be in services, for example in heathcare, leisure and education.

But while new technology is an extraordinary opportunity, it is also a threat.

And it may be that the only solution lies in a complete re-think  in how taxes operate, and wealth is distributed.

PS, This report published after the above article was written, adds an interesting dimension:Resolution Foundation

Who Gains from Growth? Living standards in 2020

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here