Softness in US economy may be short-lived
The US economy slowed down significantly in the second quarter. However, while the best part of the economic rebound is probably behind us, the US economy should continue to grow handsomely for quite a while more.
This past week has seen a slew of economic indicators confirming earlier ones that the US economy has slowed.
Earlier this week, the Commerce Department reported that personal spending dropped 0.7 percent in June, although income grew 0.2 percent. It also reported that construction spending decreased 0.3 percent in June.
Last Friday, the US Commerce Department had reported that the US economy grew 3 percent in the second quarter, well below economists' average forecast of about 3.7 percent growth.
However, part of the growth expected in the second quarter appears to have manifested itself in the first quarter instead. The Commerce Department revised the growth rate in the first quarter to 4.5 percent from the previously-reported 3.9 percent.
In any case, these are lagging indicators. What is of more interest to investors are the leading indicators. These provide a more sanguine view of the US economy.
The University of Michigan's index of consumer sentiment rose to 96.7 in July, the highest since January. This gives hope that consumer spending may hold up, possible interest rate hikes notwithstanding.
Manufacturing also appears to be doing well. New orders at US factories rose 0.7 percent in June. The positive outlook is corroborated by the Institute for Supply Management (ISM), whose index of national factory activity rose to 62 in July from 61.1 in June.
Growth in the services sector also appears robust, with the ISM's non-manufacturing index rising to 64.8 in July from 59.9 in June.
Risks to economic growth continue to be high oil prices, terrorism and rising interest rates.
The price for US light sweet crude oil surged past US$44 on Tuesday before falling back below it the following day as concern over tight global oil supply receded somewhat. Economists generally believe that prices at current levels are not likely to hit world economic growth significantly, although Barclays Capital warned in a recent report that "a sustained rise to more than US$50 would probably take oil prices into the range where they would have a noticeable impact on economic activity".
Terrorism remains on many people's minds. The belated alert raised by the US government over the weekend that terrorists had targeted specific buildings in the country three to four years ago did not exactly improve confidence in its ability to combat terrorism. However, probably of greater immediate concern is the terrorism in Iraq and the rest of the Middle East, which affects confidence in oil supply.
Finally, the US economy depends on spending. So far, consumer spending has been a major prop for the economy. Lately, business spending has also picked up, rising at an annualised 8.9 percent rate in the second quarter. However, both forms of spending would be affected by rising interest rates, although Federal Reserve chairman Alan Greenspan has promised to raise rates at a "measured" pace.
These factors pose risks to the economy and bear watching. However, most economists currently do not expect them to derail the economic expansion, at least not yet. In fact, the International Monetary Fund has of late suggested that it might upgrade its forecast for global growth of 4.6 percent this year.
Greenspan also appears to be relatively confident about the economy. In his semi-annual Congressional testimony on monetary policy last month, Greenspan said that "higher prices, by eroding households' disposable income, have accounted for at least some of the observed softness in consumer spending of late, a softness which should prove short-lived". He also told Congress: "There is no real underlying evidence of any cumulative weakness here."
Of course, economic forecasts are notorious for being prone to revision, even those by the Federal Reserve. But at least Greenspan has the means to tinker with the underlying factors, not just with his forecast.
So on the whole, it seems to me that the US economy will, indeed, continue on its expansion path for a while more.
This past week has seen a slew of economic indicators confirming earlier ones that the US economy has slowed.
Earlier this week, the Commerce Department reported that personal spending dropped 0.7 percent in June, although income grew 0.2 percent. It also reported that construction spending decreased 0.3 percent in June.
Last Friday, the US Commerce Department had reported that the US economy grew 3 percent in the second quarter, well below economists' average forecast of about 3.7 percent growth.
However, part of the growth expected in the second quarter appears to have manifested itself in the first quarter instead. The Commerce Department revised the growth rate in the first quarter to 4.5 percent from the previously-reported 3.9 percent.
In any case, these are lagging indicators. What is of more interest to investors are the leading indicators. These provide a more sanguine view of the US economy.
The University of Michigan's index of consumer sentiment rose to 96.7 in July, the highest since January. This gives hope that consumer spending may hold up, possible interest rate hikes notwithstanding.
Manufacturing also appears to be doing well. New orders at US factories rose 0.7 percent in June. The positive outlook is corroborated by the Institute for Supply Management (ISM), whose index of national factory activity rose to 62 in July from 61.1 in June.
Growth in the services sector also appears robust, with the ISM's non-manufacturing index rising to 64.8 in July from 59.9 in June.
Risks to economic growth continue to be high oil prices, terrorism and rising interest rates.
The price for US light sweet crude oil surged past US$44 on Tuesday before falling back below it the following day as concern over tight global oil supply receded somewhat. Economists generally believe that prices at current levels are not likely to hit world economic growth significantly, although Barclays Capital warned in a recent report that "a sustained rise to more than US$50 would probably take oil prices into the range where they would have a noticeable impact on economic activity".
Terrorism remains on many people's minds. The belated alert raised by the US government over the weekend that terrorists had targeted specific buildings in the country three to four years ago did not exactly improve confidence in its ability to combat terrorism. However, probably of greater immediate concern is the terrorism in Iraq and the rest of the Middle East, which affects confidence in oil supply.
Finally, the US economy depends on spending. So far, consumer spending has been a major prop for the economy. Lately, business spending has also picked up, rising at an annualised 8.9 percent rate in the second quarter. However, both forms of spending would be affected by rising interest rates, although Federal Reserve chairman Alan Greenspan has promised to raise rates at a "measured" pace.
These factors pose risks to the economy and bear watching. However, most economists currently do not expect them to derail the economic expansion, at least not yet. In fact, the International Monetary Fund has of late suggested that it might upgrade its forecast for global growth of 4.6 percent this year.
Greenspan also appears to be relatively confident about the economy. In his semi-annual Congressional testimony on monetary policy last month, Greenspan said that "higher prices, by eroding households' disposable income, have accounted for at least some of the observed softness in consumer spending of late, a softness which should prove short-lived". He also told Congress: "There is no real underlying evidence of any cumulative weakness here."
Of course, economic forecasts are notorious for being prone to revision, even those by the Federal Reserve. But at least Greenspan has the means to tinker with the underlying factors, not just with his forecast.
So on the whole, it seems to me that the US economy will, indeed, continue on its expansion path for a while more.
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