News Column

Economic Highlights for the Week Ahead

June 2, 2014



NEW YORK, June 2 -- The Conference Board issued the following news release:

Last week: For the second week in a row, the bond market made the biggest headlines. The Federal Reserve is tapering down its quantitative easing (buying fewer bonds) and the economy is catching up from a bad winter. With sentiment up, strong job growth and some renewed strength in the ordering rate, one might think artificially low borrowing rates would be moving back toward normalcy (something reflecting a 2 percent inflation rate, and maybe a 2 percent risk factor). Instead of moving up to about a 3 percent yield on a 10-year Treasury bond (on its way higher, assuming sustained economic growth), yields fell from above 2.7 percent to 2.45 percent this week.

Moreover, it's not like stock prices are falling or volatility in stocks is sending money into the bond market. Rather, the bond market is making a bet that the economy is more likely to lose steam than gain momentum. The economic data point to gathering strength. And that's the view of professional economists (as much as 4 percent GDP growth this quarter, annualized), and that's on track with a slow build in consumer sentiment as well.

Who is right? Maybe the better question is what is the proper way to view all this. German bond yields are almost a full point lower than U.S. bonds right now. And Japanese bonds are even lower. So one could argue that money is flowing away from other markets to chase the higher yield, sending prices of U.S. bonds up, which sends yields lower. If one takes that view, it would follow that money flowing away from bonds elsewhere is also decreasing money there, keeping the euro much above its purchasing parity level. This is not an argument justifying lowering yields but it does suggest lower yields are more reflective of what is not happening elsewhere around the globe than what is happening domestically.

Monday, June 2

Vehicle Sales, May

The pace of vehicle buying has remained close to a range of about 15.0 to 15.5 million units, largely as a result of long pent-up demand. With the average age of the car on the road still elevated, replacement demand is keeping sales going. All of this very likely continued in May, with no real rise in sticker prices and continued very low rates on car loans. If sales picked up, however, one question raised is whether the potholes, the result of bad winter weather, wore out the shocks and necessitated replacement.

Tuesday, June 3

6:00am EURO-AREA Inflation Rate, May (HICP, Eurostat)

Inflation is low and possibly moving lower, raising more concerns than unemployment. Inflation had been in a range of 1.5 to 2.0 percent, or below the European Central Bank target of about 2 percent. More recently, it has dipped below 1 percent, and could go lower still. Indeed, one reason the European Central Bank is discussing a quantitative easing protocol is to boost economic growth and possibly keep inflation from going lower. And that helps explain the big drop in bond yields over the past few weeks.

Wednesday, June 4

4:00am Euro-zone Producer Price Index, April (Eurostat)

With slow demand, there is no pressure on wholesale inflation. In fact, while wholesale inflation in countries like India or South Africa is running about 1 percent per month or more, in the Euro-zone the pace for "core" wholesale prices (which excludes food and energy) remains in a range of 0.0 to 0.1 percent. There is no reason to think conditions are changing. And that's part of the argument to implement some form of quantitative easing.

8:30am U.S. International Trade in Goods and Services, April (Bureau of the Census)

Exports declined in the first quarter. One question is how much bounce back is developing this quarter. The Conference Board's Leading Economic Indexes for various countries across the globe have been pointing to improved trade conditions, if industrial activity regains some solid footing. And that is also what the results of surveys of purchasing managers point toward. Look for a relatively good pickup in exports in April (more than 0.5 percent). Imports, conversely, remain slow as an overhang of inventory has to be worked off. So trade should post a solid gain in April. More importantly, trade is likely to be less of a drag on the economy going forward.

Thursday, June 5

4:00am Euro-zone Retail Sales, April (Eurostat)

Austerity, low wage growth, low consumer confidence, high unemployment, and uncertainty about economic prospects (especially now heightened geopolitical risk) have all weighed on confidence and helped keep spending relatively slow. Better retail buying waits for better news on jobs and wages. In an economy growing by less than 0.5 percent, this could be a long wait.

Friday, June 6

8:30am Employment Situation, May (Bureau of Labor Statistics)

The economy opened up more than 250,000 new jobs in April. The figure for May might come back to about 200,000, or about the trend growth of the past 12 months. Still, this would be a reflection of an economy gaining strength. And the paychecks from these new jobs, along with slowly rising sentiment, could fuel replacement buying. That includes consumers replacing old worn furniture and appliances along with continued vehicle replacement. And with final demand finally picking up, there very well could be more business investment - giving these workers the necessary tools to get the work done. Money for investment is not the issue. Indeed, neither is sentiment as surveys of attitudes of business executives through the first quarter reflect an uptick in optimism.

An uptick in consumer spending and business investment is a recipe for continued job growth of more than 200,000 per month for at least the next few months. In other words, the economic cycle could well start spinning a little faster, just as The Conference Board Leading Economic Index has been signaling. Look for more construction jobs, service sector jobs, perhaps even some manufacturing jobs.

Regionally, hiring has been the weakest in the service-dominated big population centers in the Northeast and Midwest. If the labor market is turning more robust, it is likely that service-sector employment in these markets is starting to pick up.

THE SITUATION ABROAD

Europe suffers from a disinflation that might even turn into deflation. What is the difference and why does it matter? Disinflation is a slowing pace of price increases. Deflation is outright price declines. And it matters for two simple reasons. First, businesses can't generate the revenue to pay wages and make profits if costs (especially labor costs) rise but prices rise more slowly or decline. Second and perhaps more profound is that while disinflation is hard to turn around, deflation is even more difficult to deal with. The European Central Bank is contemplating putting in a policy called quantitative easing. This simply refers to the central bank buying bonds. The money fed into circulation in this process adds to liquidity and reduces the cost of capital. It is not a question of whether it could help fight disinflation. Rather, the first question is how much is enough. Too little could make the situation worse than doing nothing at all. The second question is how soon to implement such a policy and how soon its impact can be observed. Markets are not waiting. Bond yields have fallen across the globe in anticipation of some policy action. In turn, this could force the bank to do more than it contemplated, and put it into place sooner. Clearly, the markets have gotten ahead of the bank and the bank may wish to jump back into the lead.

FACT OF THE WEEK I

10 million

Once upon a time, the U.S. produced as much as 10 million barrels of crude oil per day, the lion share of which came out of the ground in East Texas. By the early part of the last decade, before the start of the Great Recession, production fell to about 5 million barrels. Now, shale oil in North Dakota, Pennsylvania, and elsewhere has pushed production back up to about 8 million, and it could reach 10 million over the next few years. In other words, shale could push the U.S. into position to overtake both Russia and Saudi Arabia as the world's leading producer of oil. Meanwhile, production of energy from renewable sources like wind and solar continue to progress. This is really a story about solving one of three great problems of the century. There is now an answer about whether the global economy will be stifled by a lack of available energy. It will not, at least not soon. Now, the effort can shift to answering whether growth will be stymied by a lack of fresh water. And then there is the question of what to do with all the garbage we produce.

QUESTION OF THE WEEK

Can India really become an economic powerhouse?

The question is not whether it can. Rather the big question is whether India can change enough to be a powerhouse. That question depends on reforms to unleash the power of India's service sector while revving up its nascent industrial sector. India's manufacturing is largely a cottage industry. Small enterprises make up 84 percent of its manufacturing base, compared to China's 25 percent, for example.

What prevents consolidation and modernizing to gain efficiencies and economies of scale? Start with high inflation. Both the U.S. and the Eurozone target a 2 percent inflation rate and struggle to get back up to that level. But Indian monetary policy is trying to squeeze down its 5 percent plus inflation rate. Thus, India's small manufacturing plants do not generally rank among low cost producers.

Relatively high inflation also means relatively high cost of capital. There's also the infrastructure problem which delays delivery of raw commodities and delivery of finished products, and makes them more expensive. Also, with a high public debt to deal with, and high debt service because interest rates are high, because inflation is high, there is the problem of funding infrastructure reform to reduce delays and costs. Last, India needs to upgrade its education programs to raise the skill set of the average worker. To be sure, there is a highly educated technical and/or managerial elite. But the average worker doesn't fair well by international comparison. Again, the call on public resources to upgrade the educational system meets a challenge of the scarcity of available funding.

Policy is changing hands in India to a new group, now charged with meeting these challenges. As with any new administration, they start with a degree of public support. How much can they do and how effective their policies will be also impact the willingness of companies and investors to pour capital into new projects. India has great potential but many hurdles to turning potential growth into actual growth. Good luck.

TNS 24HariCha-140603-30FurigayJane-4754363 30FurigayJane


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