USA Outlook Update (July 28, 2007, New grap added on Nov. 7, 2010): A Recession Watch! Massive downward revisions in the 2nd Quarter (2007) GDP report paints a much weaker US economy than we have perceived.
USA Outlook Update (May 2, 2007; Note added on March 5, 2010): Current status of US economy and its prospects.
USA Outlook Update (Nov. 19, 2006): Inflation update
USA Outlook Update (Oct. 31, 2006): September consumer spending is strong! Media reports are wrong.
USA Outlook Update (Sept. 7, 2006): Personal Consumption Expenditure and GDP from 2005 to 2006; a recession is not in sight.
USA Outlook Update (July 28, 2006): GDP of second quarter of 2006, and the prospect of inflation and interest rate
USA Outlook Update (May 26, 2006): Revised real GDP of 1st Quarter of 2006 and its adjustments
USA Outlook Update (May 19, 2006): GDP of 3rd Quarter of 2005 to 1st Quarter of 2006 and beyond
USA Outlook Update(January 28, 2006):GDP of 4-th Quarter of 2005
USA Outlook Update:(January 21, 2006)
Outlook Update(August 18, 2005)
Outlook Update:(April 14, 2005)
With the stock market behaving as if a recession is coming, some readers probably want to know our assesment of the economic outlook in The United States of America. As has been said in the last outlook update, American economy is entering into another bridge phenomenon as discussed in Article No.2. However, there is some difference between this bridge phenomenon and the last such event in the late 1990's. The last bridge phenomenon witnessed rapid expansion of trade deficits accompanied by steady GDP growth rates. This bridge phenomenon consists of rapid expansion of trade deficits and the slightly decreasing GDP growth rates. We have been estimating that the GDP growth rate will drop toward 3% annual rate in 2005, and then toward like 2.5%. It probably will hit a bottom near 2.5% and continue at that level well into 2007 and 2008. A recession is certainly not in the card in near future. The stock market was dancing with overly rosy forecasts that GDP growth rate will continue to be 4% plus as far as the eye can see. When the reality sets in, the market is panicking and now it thinks as if a recession is imminent. The truth lies between the over confidence of the market in the past and its loss of confidence at the present. We have been talking about an eventual collapse of Dollar and a world wide depression. But this kind of catastrophe from the growing imbalance in the grobalization sheme is many years away; it can be a decade or more away even if the global financial policy makers continue their misdirected policies as they are still pursuing today.
Outlook Update:(Feb. 12, 2005)
The graph accompanied Jan. 17 update contains two calculation errors. The November adjusted trade deficit was erred on the upside and the September data was erred on the down side. Those errors are corrected in the graph, and a new data point of December adjusted trade deficit is plotted as a blue dot. After this revision it becomes clearer that the modest fall of Dollar vs. Yen and Euro during the spring of 2002 has only slowed the expansion of US trade deficit a little bid. The subsequent mild Dollar rebound of the fall of 2002 is now producing a sharp escalation of US trade deficit in the final quarter of 2004. Though the direct trade deficit with Japan has been stagnating since the fall of 2004 and the direct deficit with Europe is also showing the sign of peaking due to the weakness of Dollar vs. Yen and Euro in 2002, all those positive indications are swamped by the rapid expansion of the direct trade deficit with China, the worst senario feared in an earlier discussion in this column. Since Japan and Taiwan are using China as their surrogate exporter this rapid expansion of the direct trade deficit with China is reflected in the suspended large overall trade surpluses of Japan and Taiwan. The major reason of this still expanding direct trade deficit with China is, of course, the persistant under-valuation of Chinese Yuan vs. US Dollar.
The Chinese economic expansion is due to the massive Dollar buying of Chinese Government in order to peg Yuan to Dollar at a fixed rate. As Dollar is bought, corresponding amount of Yuan is released into the domestic Chinese market. Those Yuan will eventually end up in the hands of national banks of China. Chinese local governments have exclusive priority to borrow from the local branches of national banks, and have used those borrowings to escalate fixed invesments rapidly, often withought careful calculation of future economic viabilities. This local government led expansion, often in the form of joint ventures with outside investors, is the real engine behind the economic growth of China. Those local governments will be the strongest voice against the revaluation of Yuan, since a free floating Yuan means the cease of Dollar buying and less credits through the local branches of national banks in addition to the higher valuation of Yuan vs. Dollar that will topple their new joint ventures that are mostly to manufacture and export to USA. It is unlikely that the central government of China can summount such a formidable local oppositions and will alow Yuan to float voluntarily in any forseeable future. We believe that the soft persuation of US Government will fail to push Yuan to revaluate in 2005. This means that US trade deficit will continue to expand in 2005, or in the most favorable case stagnate at a very high level. The rate of expansion of US trade deficit in 2005 will probably fall between 9 to 12% comapred to 2004 average. This kind of expansion will also mean that the ratio of trade deficit to nominal GDP will increase further in 2005, and thus another "bridge" phenomena is probably in the making.
The unanticipated event that may upset this outlook is a direct confrontation about the valuation of Yuan in the form of import tax imposed on Chinese made goods, as discussed in the comment titled "looming confrontation about the value of Chinese Yuan". If such an import tax is imposed, the effect on trade balance will be immediate, not like two or more years of delay in the case of varying exchange rates. As mentioned in the comment, China is replaceable in the globalization scheme. Thus the manufacturing base will move away from China if a significant import tax is imposed on Chinese made goods. However, such trnasitions take time, and we will see disruptions before the dust settles in the event of such an import tax. At first import prices will rise and US trade deficit will shrink or stagnate according to the amount of import tax imposed. Then as the manufacturing base shifts away from China into other developing countries US trade deficit will turn upward again. During and after this transition period Chinese economic expansion will be halted. The global commodity prices will fall and that will compensate the rise of import prices of manufactured goods to make the overall inflation rate in USA unchanged, but the economic performance of USA will suffer due to the temporary dip of the trade deficit.
Out Look Update (Jan.17, 2005)
The November, 2005 trade balance report raises some important points and desreve a close attention. The October trade deficit number is revised up sharply and the Novermber trade deficit number seems to support this sharp upward revision. In the figure the monthly merchandise trade deficit excluding the import of oil and the export of agricultural commodities are plotted as black dots. The red dots are monthly averages of Yen/Dollar with the time scale shifted toward the right by two years and three months; for example, the red dot appeared at March, 2003 is actually the value of Yen/Dollar at January, 2001. The reason of this time shift is explained in Article No.2; the currency movement tends to foreshadow the trade balance at least by two years.
The figure implies that the modest drop of the value of Dollar versus Yen that occured in the spring of 2002 was not effective in curbing the US trade deficit in recent times. With the subsequent slight bounce of Dollar as shown by the red dots around October of 2004 in the figure, US trade deficit exploded anew. This is the picture that the competitive power of US industry is steadily eroding due to the long running trade deficit, not due to the slow growth of US trading partners as some soothsayers try to claim. Looking ahead from the figure, no good news with regard to the trade deficit should be expected through the most part of 2005. In the second quarter of 2004 the merchandise trade deficit is about 5.5% of GDP. In 2005 this number will certain to top 6%. As pointed out in Articles No.2 and No.7, for a society to grow economically based on running large trade deficits, that is equivalent to borrow a huge sums from foreigners for domestic consumption, new and high paying categories of jobs must open up to compensate the loss of jobs due to the corrupting effect of the trade deficit. The late 1990's was such a period when computer based high tech industry flowered and ushered in the era of internet. However, it is not the situation at present, and the current rapid expansion of trade deficit is not going to lift GDP growth rate very much. For the most part of 2005, GDP growth rate will probably stay at 3.0 to 3.5% level with the possibility of further deterioration at the end of 2005. Another gentle drop of the value of Dollar as the red dots in the figure shows near the end of 2005 is an importat land mark to watch. If that modest drop of Dollar (occured in the middle of 2003 and prompted Japanese Government to launch that 300+ billion dollar worth of dollar-buying frenzy) does not curb US trade deficit in any meaningful way, then we are sure that US economy has entered another so called bridge phenomena as discussed in Article No.2. This bridge phenomena will be accompanied by subdued economic growth rate but equally explosive expansion of the trade deficit compared to the last bridge phenomena that occured in the late 1990's. As US trade deficit expands steadily, the selling pressure for Dollar will built up in the currency market. Very soon Japanese Government will need to intervene again, this time probably with one trillion dollar or more dollar buying operations. If Japanese Government can not muster the political power to perform such an astronomical dollar-buying operation, then Dollar will collapse, followed by a sharp curtailment of US trade deficit with two years lagging time, and US economy will experience another burst of bubble that will certainly be much more painful than the last burst of bubble that happened from late 2000 to 2001.
Out Look Update (Jan.07, 2005)
This leg of falling Dollar that started at the spring of 2002 has finally shown effects on US trade balance. US trade deficit was rising rapidly toward June, 2004 and than entered a period of peaking process. The export excluding agriculture commodities is growing, though at a measured rate. The imports excluding petroleum related products has peaked in June, and has stagnated since then. Thus the adjusted trade ballance excluding oil and agricutural commodity has peaked in June and now is at the level of March, 2004. Even the overall merchandise trade balance that is boosted by the high oil price is showing the sign of stagnation. Since the fall of Dollar continued until the end of 2003, the stagnation of US trade deficit probably will continue for a while. We expect US econoomic growth rate will continue its slow descend throughout 2005 with some unpleasant surprise possible in the latter half of 2005. Some recovery of the economic growth rate during the first half of 2006 is in store, but then the declining growth rate trend will resume during the second half of 2006, reflecting the very recent fall of Dollar. Only thing that can derail this slow decline of the growth rate trend is a sudden massive currency market manipulation by Japan, in the order of 500+ billion Dollars to boost the value of Dollar substantially. If that happens, US consumption along with the trade deficit will burst upward in 2007. On the other hand if Japan does not defend the 100 Yen/Dollar level, a sharp and sudden fall of Dollar is in store, and US economy will slide into a recession in 2007 to 2008 along with a declining trade deficit.
Some analysts argue that the budget deficit of the federal government is contributing to the trade deficit. However, this argument is clearly wrong; we only need to remind ourselves that during the Clinton era, budget deficit was under control but the trade deficit exploded. When the federal government runs deficit, it borrows first from the pool of foreign money provided in the form of trade deficit. When the government budget is balanced, it will be the private sector that borrows the entire amount from that pool of foreign money. Though both types of borrowing will eventually recycle those foreign money back into the whole economy, the first type of government-borrow-first arrangement makes the speed of circulation of money slower compared to the second type private-borrow-first arrangement because governments are always more inefficient in spending the money it posses than the private sector. Thus if government budget is balanced, the consumption component in GDP will be larger than the case of budget deficit. However, larger personal consumption means more import and thus larger trade deficit; it is totally in contradiction to the arguments of many financial analysts but explains well why the balanced budget and the exploding trade deficit came in unison during the Clinton era.
Discussion: Trade Deficit and GDP (Oct. 22, 2004)
The core trade deficit (exclude oil related imports and agriculture related exports) has peaked in July at 46.7 billion dollars, and are 38.5 billion and 39.9 billion dollars in July and August respectively. Probably the two-year-leading-currency effect as discussed in Article No.2 of this website is taking effect due to the meaningful fall of Dollar in the spring of 2002. However, the fall of Dollar in 2002, though is not small, is not very large either, so we only expect a moderate reduction in US economic activity. A more significant slow down of US economy will only come in the latter half of 2005, reflecting another leg of meaningful fall of Dollar versus Yen and Euro in the latter half of 2003.
Country-by-country trade data published monthly are non-seasonally adjusted. The seasonally adjusted data are only available quarterly. Thus the seasonally adjusted data only cover up to June of 2004. To use non-seasonally adjusted data to gauge the recent performance of country-by-country trade pattern is rather difficult. Year-to-year comparison using non-seasonally adjusted data only tells us that something have happened during the past 12 months, not necessarilly what is happening in the most recent reporting month. Looking at the monthly chart of non-seasonally adjusted countrywise trade deficit data, it seems that US direct trade deficit with China is still growing strongly; US direct trade deficit with Europe may be starting to peak, but the evidence is not convincing; US direct trade deficits with Japan and NIC's (newly industrialized countries, mainly smaller Asian countries) are staggernating. It should be noted that Japan's overall trade surplus is growing rapidly in recent months due to strong exports to China and NIC's. This means that the direct trade deficit with Japan may be small, but the indirect trade deficit with Japan (Japan using China and NIC's as its surrogate exporters) is still very large.
To blame the recent deacceleration of US economic growth on the rising
oil price is without the base, since the rising oil price can only hurt
the the economy if it is pushing inflation higher, but is not according
to the published inflation gauges. We can only blame the subpar economic
performance on oil price if we believe that the published inflation gauges,
especially the price deflator used in GDP report, are not reflecting the
real inflation rate by overemphasizing the improvement of quality of goods
that US consumers buy.
Discussion: Second Quarter GDP and Beyond (Sept. 15, 2004)
At the time when we made the first forecast of US economic performance in this space on Nov. 7, 2003 and called for the growth rate of real GDP to slow in the second half of 2004, most economic analysts were widely optismistic about the final six months of 2004. Now the consensus of economic analysts calls for slowed growth rate during the second half of 2003; even their consensus projection of the growth rate of the second half of 2004 becomes not very far from our projection of annualized rate of +3.5%. However, we project that the growth rate of real GDP will continue to come down in the first half of 2005, with a marked slow down in the second half of 2005 and an upturn in the growth rate will only occure in 2006 at the earliest, wheareas most economic analysts are still widely enthusiastic about 2005 and beyond.
The important economic statistics of recent months is the slow GDP growth rate of the secon quarter; the recently revised number is up 2.8% and that number should be compared to +4.5%, +4.2% and +7.4% of the first quarter of 2004, the 4-th quarter of 2003 and the 3rd quarter of 2003 respectively. The slow growth of GDP in the second quarter is mainly the result of the dismal performance of inflation adjusted personal consumption that only grew +1.6% in the quarter. It is important to understand why this sudden pull back by US consumers since the underlying reasons will help us to gauge the economic performance of the second half of 2004. Many analysts immediately point their finger toward the high oil prices during the second quarter as the culprit, arguing that high oil prices reduce the buying power of consumers on one hand and hurts consumer sentiments at the same time. However, the validity of this argument is questionable. Personal spending is measuring both the purchase of non-oil related products and oil-related products by consumers. Merely shifting consumer spending more to oil-related products due to higher prices of those goods should not itself cause the overall personal consumption to suffer. Also through the second quarter, various consumer sentiment surveys have recorded strong consumer optimism, in total contradiction with the argument. Then what is the real reason of this sudden swoon? We first look at the real (inflation adjusted) disposable personal income. The growth rate of the 2nd quarter of 2003 was +4.2%, the 3rd quarter of 2003 was +7.9%, the 4th quarter of 2003 was +1.4%, the 1st quarter of 2004 was +2.4% and the 2nd quarter of 2004 was +2.4%. The growth rates of the real (inflation adjusted) personal consumption were +3.9% for the 2nd quarter of 2003, +5.0% for the 3rd quarter of 2003, +3.9% for the 4th quarter of 2003, +4.1% for the 1st quarter of 2004, and +1.6% for the 2nd quarter of 2004 respectively. The real disposable personal income does not synchronize with the real personal consumption from quarter to quarter, but in longer run, weak income growth will result in weak personal consumption, and the relatively weak growth of real personal disposable income since the fourth quarter of 2003 has finally caught up and has caused the drop of the growth rate of the real personal consumption in the 2nd quarter of 2004. Another important factor is the home mortgage rates. In recent years US personal consumption has been supported by falling home mortgage rates, escalating housing prices and the aggressive mortgage refinancing that put sizable readily spendable cash in the hands consumers; those consumers take out new mortgages the amount of which far exceeds the amount of their repaid old mortgages, but their interest rate payments are steady due to the falling mortgage rates. However, the mortgage rates rose suddenly in the 2nd quarter of 2004, causing the reduction of mortgage refinancing and thus curtailed the spending power of US consumers.
The next step is to understand why the rise of the mortgage rates and the stagnating growth of the real disposable personal income. The inflation rate as measured by the core CPI has peaked in March and has been sliding down through the second quarter. Thus inflation can not be the reason for the rise of the mortgage rates in the second quarter. One possible reason is the ending of Japanese Government's buying of Dollar; bond traders feared that the absence of Japanese Government means less buying of US treasuries and thus higher long term interest rates. The endless rise of the oil prices through the second quarter has also planted the fear of the phantom of inflation in the hearts of bond traders at a time when the actual inflation rate is falling. Then there has been the fear of Federal Reserve's policy to put the short term interest rate back to the normal stance; this move actually should help to reduce the inflation danger and thus reduce the long term interest rates, but at that time bond traders' fear has been outrunning the logics. When those fears have been proven just to be phantoms, long term interest rates along with the mortgage rates have fallen anew since July. The stagnation of the growth of the real disposable personal income is not related to inflation either since the nominal (no inflation adjustment) disposable personal income has shown very similar growth pattern as the real disposable personal income. In this economic recovery, businesses are loath to hire more permanent emplyees due to the lack of clear view about the future of the economy. Thus the increase of workers, the normal phenomena of a recovery cycle, only means many more temporary workers and low pays. This phenomena immediately translates into the stagnation of personal income. Foreign competiotions as manifest in the run away trade deficit is probably the underlying trend of less commitment to long term hiring by businesses and thus is the root cause of the stagnation of the personal income.
Let us now assess the possible outcome for the second half of 2004. The stagnation of personal income growth is not likely to be reversed. However, mortgage interest rates are already falling anew since July, so the consumer spending should get a moderate boost. We expect that the economic performance in the second half will be better than the second quarter, with GDP growing close to 3.5% (annualized).
Some words about the trade balance that is the favorable topic of this
web site. The fall of Dollar in the spring of 2002 against Yen and Euro
should be translating into the slow down of the growth of US trade deficit
around the middle of 2004. After taking away oil related imports (higher
oil price and balooning energy related trade deficit is a negative to the
economy, unlike the deficit due to manufactured goods that will boost
consumption), the adjusted imports are showing signs of a slowed growth
to stagnation since the spring. However, the adjusted exports (subtracting
away agricultural products and a small amount of energy related exports)
is showing a more marked stagnation at the same time. Usually weaker Dollar
should be boosting adjusted exports but is not. The result is that the
adjusted trade balance is not yet shrinking. The quick stagnation of exports
is an interesting event and is also a warning to US economy. This phenomenon
means that the exports from US, mostly are industrial supplies, machinaries
and transportation related goods, are not driven by market forces but by
political influences. Many countries sustain large trade surpluses with
USA, and receive constant threat of retaliation from US domestic industries
under heavy pressure of foreign competitions. Thus those countries have
a tendency to deliberately increase imports from USA even deemed not favorable
from pure market considerations to molify US anger toward their large trade
surpluses. When their exports to US (means imports of US) show any signs
of softness, they will gladly cut back those political imports from US,
and thus the quicker stagnation of US exports than US imports. This means
that the real competiveness of US exporters is weaker than the trade figure
shows. On country by country basis, direct imports from Japan, Taiwan are
slowing, but imports from China is growing strongly. Also imports from
South Korea has jumped strongly in recent months and imports from Euro
region still shows no sign of abatement. The expanding imports from Canada,
Mexico and the remaining Latin America are related to higher energy and
other commodity prices. Overall we expect that the merchandise trade deficit
of USA will grow more slowly in the second half of 2004 when the full impact
of a weaker Dollar since the spring of 2002 sinks in, exerting a downward
pressure on the growth rate of real GDP.
Discussion: GDP, Aug. 2, 2004
July 30 GDP report says that the real GDP of the second quarter of 2004 has grown by 3.0 % in annualized rate, and the growth rate of the first qurter is revised upward to 4.5 % from the original estimate of 3.9 %. The surprisingly weak 3.0 % growth rate of the second quarter is causing a mini panic among economic analysts; many has started to paint a much more bleak picture for the second half of 2004. We should realize that the new statistics is pushing the robustness of the first two months of the second quarter back into the first quarter and thus causing the lackluster preformance of the second quarter on one hand and much more properous first quarter than initially thought. Without the push back effect, the second quater GDP will be growing at 3.6% against 3.9 % growth of the first quarter. Quarterly GDP growth rate gyrates widely and subjects to significant revision even many years later. For example, this new release of GDP statistics on July 30 has revised GDP growth rates back to the first quarter of 2001, and causing the original two consecutive quaters of negative growths, the second and the third quarters of 2001, to disappear; this revision wipes out the most recent official recession since according to the definition a recession is consisting of two consecutive quarters of negative growths in GDP. Does this mean that the recent economic down period as anyone concerned about the economic condition of the country has noticed is just a mirage? Of course not. As we are emphasizing that it is futile to hang on to the detailed number of GDP growth rate in each report whereas the accuracy of such estimate is probably only good to like plus-minus 1.0% when is originally reported. What we should look at is the gross trend of GDP growth rates. No matter we use the original estimate or the new estimate, GDP growth rate has peaked in the middle of 2000, has headed down and then stabilized. It has only started to recover in a sustained way since the second quarter of 2003. What we are syaing here is that this recovery will be short and the trend of the growth rate will weaken again around the middle of 2004 and will continue to go down until the end of 2005. Only in 2006 we may see another upward turn of the trend of GDP growth rate. The down turn of the trend will probably bottomed out around 2% annualized growth rate, or a little lower. We are definitely entering a relatively slow growth period, restrained by the run away trade deficit and by the fact that Dollar can only retain its value by frequent massive currency market manipulations of Pacific rim countries.
The trend of an economic movement is powerful. Seemingly shocking noneconomic
events, in short term looks like causing huge dislocation in economy, are
often really irrelevant to the long term trend of the predestined economic
movement. Take the 911 tragedy as an example. US economy has been going
down before 911. The growth rate of real (means inflation adjusted) personal
consumption in GDP account is as follows: +1.7% in the first quarter
of 2001, +1.0% in the second quarter of 2001,
+1.7% in the third quarter of 2001, +7.0% in the fourth quarter of 2001, and +1.8% in the first quarter of 2002. It is hard pressed to find any effect of 911 from the statistics. How about the business investments? It is -13.6% in the first quarter of 2001, -7.6% in the second quarter of 2001, -10.5% in the third quarter of 2001, -22.7% in the fourth quarter of 2001, and +16.8% in the first quarter of 2002. In order to associate the business investment numbers to 911, we need to stretch our imagination to argue that businessmen were very calm right after the tragedy, started to panic a few month later when consumers were already resuming their spending spree, and then abruptly reversed their panic into a euphoria just one quarter later. Many analysts and money managers attribute the current financial and stock market stagnation to the fear of noneconomic events like terrorism and the coming presidential election. We believe that the stagnation reflects the sencing of the market of the coming trend change in the long term movement of the economy, no matter who is elected president in November or irrespective of other noneconomic events.
General Discussion: July 19, 2004
Since the long term projection made on Nov. 7, 2003, more than 6 months have passed. It is a good time to review that long term projection and to extend the projection further into the future. Readers are reminded again that our projection about the course of the economy is based on the belief that in the globalization era, the factors shaping up the globalization, that is, the relative values among major currencies and the trade balances have significant influence on the global economy as a whole and causes booms and busts in various economic entities, not necessary in a synchronized way; the old fashion factors to shape the outcome of an economic entity like monetary and fisical policies are often overshadowed by the new globalization factors.
In the first phase of Nov. 7, 2003 projection, we said that the 4-th quarter of 2003 and the 1st quarter of 2004 would not be as sizzling as the 3rd quarter of 2003, but would be respectable. The real GDP growth rates of those two quarters were respectable 4.1% and 3.9% respectively. The first two months of the 2nd quarter of 2004 were robust in terms of the consumer spending, but the consumer spending cooled down substantially in June. As a whole we expect the growth rate of real GDP for the quarter will remain around 4%. The second half of 2004 will see the slow down of the growth with real GDP around 3.5% and slightly below. This gradual slow down will continue into the first half of 2005, and there will be a more meaningful drop in the growth in the second hald of 2005, probably to 2% or below. There probably will be a rebound in the first half of 2006. Through this rather stoggy cycle we do not expect the growth rate of real GDP will dip into the negative territory so that we are not talking about a recession.
What will cause US economy to have another robust boom like the one
in the latter half of 1990's? It requires Japanese Government to buy up
a few trillion dollars in the currency market and keep US Dollar above
130 Yen/Dollar level for a prolonged period; we do not foresee this possibility.
If in the equaly unlikely event Japanese Government walks away from the
currency market manipulation outright, then Dollar will collapse and a
sever recession will set in sometime in 2007. The most likely senario is
for Japanese Government to buy up several hundred billion dollars from
time to time to keep Dollar to fall below 100 Yen/Dollar level, though
the amount of dollar needed to be bought will increase steadily. In this
most likely senario, US economy will continue to grow slowly whereas the
trade deficit will remain around 5% of GDP. The external debt of USA will
increase steadily since every year's trade deficit will be added to the
external debt; eventually the whole globalization scheme will collapse
under the weight of unbalanced trades.
Projection: June 26, 2004: Inflation
Since the beginning of 2004, CPI core index (consumer price index less
energy and food) has turned into a trend of steeper rise than previous
years; in 2003 CPI core rose 1.1%, and in 2002 it rose 2.0%. CPI core is
much more resilient and less volatile than the overall CPI index that is
called CPI all. From past experiences, when CPI core index has a major
trend change, the trend has lasted at least for one year, and often much
longer. Assuming this new trend will also last at least for one year, a
simple extrapolation shows that CPI core will rise about 3% plus in 2004.
This kind of inflation rate will require a Fed. Fund's rate substantially
higher than the current level.
Projection: Feb. 25, 2004: About Jobs (a technical analysis)
Jobs, or lack of them become not only as a big economic concern, but also is shaking up as an important political focal point in this election year. Here, we will present a technical analysis of the job situation. A technical analysis is a study based on the past empirical experience and tries to gauge how the current situation will evolve. Before going into the analysis, we need to discuss which employment data the analysis will use. As is well known, there are two well publicized data samples about the job situation; the nonfarm payroll employment survey and the household survey. The nonfarm payroll employment survey covers established businesses and tally their employees, full time and part time, but will miss selfemployed and fluid situation of small businesses; the area of lack of coverage needs to be projected. The household survey supposedly will cover the selfemployed. However, the coverage of selfemployed causes a problem, especially at a time of economic hardship and many laidoff high tech workers. It is very easy to establish a small business on line today. Many unemployed high tech workers probably are doing exactly that. Unfortunately most of them only brings in a meager income, and they really should be classified as unemployed. But in a household survey many of them will answer as selfemployed, thus causing a distortion in the survey. Also the size of the statistical sample of the household survey is a concern. Each month the household survey covers about 60,000 household entities only. Assuming each entity consists in average 2 workers, the survey will only cover 120,000 workers. It requires a huge extrapolation to be projected to the whole population. A small change in population composition thus can cause a large fluctuation in the result of the household survey. This is why there are suspicious gaps in the household survey data when the population compositions are readjusted. The nonfarm payroll data consists of monthly survey of 300,000 businesses. Assuming that each surveyed business average out with 100 employees, then the survey will cover like 30,000,000 workers. With such a large sample, the projection to the whole population is less prone to error. That is why traditionally in economic circle the nonfarm payroll data is cosidered to be more accurate. We also adhere to this notion and use the nonfarm payroll employment data exclusively for this analysis.
We start by comparing the economic growth, that is, the percentage change
of real GDP with the percentage change of nonfarm payroll employment data
from quarter to quarter. To smooth out the violent oscillations in the
quarterly real GDP growth data, 4 quarter moving average of real GDP growth
are computed and plotted as black circle in the following figure. To match
that real GDP data, quarterly averages of nonfarm employment data are taken,
percentage changes from quarter to quarter are calculated, and 4 quarter
moving sums of the percentage changes are plotted as red circles in the
The discrepency between the black curve (GDP) and the red one (employment) measures the productivity gain; larger the gap between two curves, higher the productivity gain is. The red curve is much more smoother than the black one. The recovery from the employment bottom are marked from "a" to "e" for the red curve. The rise of the red curve from the bottom is more prominent near the bottom. In each rise we can draw a contact line, the green ones, to the red curve, and the red curve moves up along the green line and then cross the green line toward the right in a sidewise movement. The rightmost green line around mark "e" is for the present time. We can confidently say that during 2004 the red line will not deviate considerably from the green line. Since the green line passes the point 0.5% at the end of 2004, we can say that the nonfarm payroll employment probably will grow like 0.5 % from the median of the fourth quarter of 2003 to the median of the fourth quarter of 2004. In a very optimistic estimate we assume that the red curve will move away and above the green line somewhat but most likely will not exceeds 1.0% by the end of 2004, judging from the past performance as shown in the figure. Thus we obtain the growth in nonfarm payroll employment from the 4th quarter of 2003 to the 4th quater of 2004 in the range from 0.5% to 1.0%. Translated into the number of jobs created, it will range from 0.65 to 1.30 million jobs, but the real number probably will be closer to the bottom of the estimated range. It should be noted that in contrast to the smooth red curve, the black curve is quite bumpy. Thus even the economic growth in 2004 is significantly uncertain, say falls somewhere between 3 to 5%, the projected job growth will still hold. In other words the divergence between the reasonable economic growth and the lackluster job creation will continue in 2004.
Many attribute the productivity gains squrely to technology advances. During the latter half of 1990 when US corporations invested heavily in information technology, this explanation may sound reasonable. However, during the recent recovery marked by "e", corporations are not expanding their investments in information technology, but the productivity gains have become even more impressive than the late 1990's as the ever bigger gap between the black curve and the red one indicates. The one cause of productivity gain that many desperately try to forget is "outsourcing". Since outsourcing is done from the lower paid jobs first, it will definitely improve the productivity of a company. Alternatively we may say that if outsourcing does not improve productivity, then there will be no reason for US corporations to do outsourcing at all. This explanotion of outsourcing based productivity gain fits well with the data from 1995 on. We should notice that during the latter half of 1995, supposedly the era of many new jobs created by computer and information technology, the rate of job creation is quite slow compared to the preceeding eras as the figure shows; this phenomena can be explained easily if we attribute the improvement of the productivity of the latter half of 1990 more to outsourcing than to information technology advances. Then after 2001, the outsourcing intensfied, and even more anemic rate of job creation and larger productivity gains persisted. It should be reminded that the slopes of the green lines are steadily flattening out as the globalization proceeds; it indicates that the outsourcing is steadily intensifying as globarization advances and is causing increasingly anemic job growth in USA, even at a time when real GDP grows substantially.
Some may ask how an economy can grow and personal consumption can expand
whithout substantial creation of jobs. The answer is that it is due to
the magic of trade deficit (Refs. 1
and 2 ). Trade deficit is nothing
more than to borrow from foreigners and spend. This borrowing from foreigners
is translated into domestic borrowings and windfalls that have little to
do with the creation of jobs. Let us go through two major routs to show
how the trade deficit is translated into domestic "borrow and spend" booms.
As foreign made goods flood the domestic market, pricing power is taken
away from the domestic market. As the consumption level rises (Americans
must digest all those imported goods), not inflation but disinflation becomes
the norm. Thus The Federal Reserve System can keep interest rate low for
a very long period beyond the imagination of modern economists. The prolonged
low mortgage rates create a huge housing bubble, and home owners use refinancing
and home equity loans to get hands on a large amount of money. This route
of borrowing through the housing market definitely boosts consumption,
in the form of buying imported goods, but results in only anemic job creation.
Furthermore, as trade deficit baloons, large sums of dollars are handed
over to foreigners. Foreigners must deposit this huge amount of dollars
back to USA, mostly in the form of buying US Treasuries. Some one in USA,
either US investors and/or US Government, must sell those US Treasuries
to foreigners. Those American investors who receive dollars for their sale
of US Treasuries will reinvest the dollars in the stock market, creating
a bubble in the stock market which bestow a windfall on stock holders and
Wall Street professionals. On the other hand when US Government gets the
proceeds of saling Treasuries to foreigners, it can engage in a deficit
spending binge. This rout through US Treasuries again will push up personal
consumption, but disconnected from any effect of creating meaningful jobs
in USA. Anyone who is interested to know how a jobless society can prosper
simply from running huge trade deficits is invited to read Article No.7
posted in "The Section for Everyone" of this website, or click
here to go directly to the article.
The rate of inflation in the coming economic slowdown is uncertain. Consumer spending must come down with the decrease of the merchandise trade deficit. If the will of consumer to spend declines slower than the decrease of the merchandise trade deficit, the price level in general will rise and will limit the ability of the Federal Reserve System to lower interest rates to combat the economic slowdown. If consumer sentiment cools faster than the fall of the trade deficit, then the disinflation will continue and FED can still lower the short term interest rates. However, with the short term interest rates already at very low level, how much more FED can act without falling into the trap that Japan is in is a question.
The employement situation will only improve modestly during the current
phase of economic expansion, since unlike the boom of Clinton era there
is no prospective of the opening up of any new industry to absorb a large
number of labors. The manufacturing sector employment will continue to
be pressured in an economic expansion based on trade deficit. The service
sector is experiencing increased number of jobs since more people are needed
to bring the increased imported goods to consumers, and more hands are
required to recycle the Dollars accumulated in the accounts of foreigners
(due to the increased trade deficit) into US financial markets. As the
economic slowdown sets in, the situation will be reversed, that is, less
pressure on the manufacturing sector and doom in the retail and financial
service sectors. However, the fall of Dollar in the spring of 2002 and
in the fall of 2003 are too small to really turn around the US manufacturing
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