May 23, 2005
Is the economy slowing, or is it not? As usual, the answer depends on the data you're consuming and the economist who's got your ear.
For those inclined toward optimism, the latest guesswork from the National Association for Business Economics brings a moderate improvement in the economic outlook. "After a mild slip during the early spring, our panel expects the expansion to regain its footing,” Carl Tannenbaum, chair of NABE's outlook survey committee, said in a press release dated today.
The NABE panel, comprised of 50 professional forecasters, predicts GDP will rise only by a real (inflation adjusted) annualized 3.0% in this year's second quarter, although the rate of economic growth will increase to 3.5% in each of the third and fourth quarters, the group forecasts.
But how to square that with two recent regional manufacturing surveys from the Federal Reserve system that paint a picture of a less-than-trivial slowdown? The Philadelphia Fed's manufacturing index for May for its region dropped to its lowest level in nearly two years. Another manufacturing gauge for May released by the New York Fed for its region offers corroborating signs of a slowdown. The Empire State Manufacturing Survey for May fell to its lowest since April 2003, providing another reason for remaining cautious about the prospects for second-quarter GDP.
That is, unless you take the NABE forecast as gospel. Then again, the NABE has been less than a rock of stability on its forward economic assessments. In its February survey, the consensus expected GDP in 2005 would advance by 3.6%; now the group says 3.4%, albeit with the kicker that the second half of this year will pick up speed over the first half. The rising trade deficit, we're told, was the culprit that trimmed the 2005 GDP forecast.
Ah, but the trade deficit in its last statistical outing showed signs of narrowing. The record $60 billion of red ink in the trade balance for February slipped to just under $55 billion in March. Will the trend continue? If so, GDP's pace of expansion may yet deliver some upside surprises.
To judge by last week's action in the dollar, more than a few folks in the forex community seem to agree. The U.S. Dollar Index continued to forge higher last week, closing on Friday at nearly 87, the highest since October 2004.
Adding to the bullish atmosphere on valuing the dollar lately is the chit-chat about China and its export machine. In particular, the tough talk emanating in Washington on the matter of pushing for a floating of the Chinese currency, the yuan, has some in the forex world licking their speculative chops. One scenario thrown about runs like this: China will be persuaded to remove the dollar peg and instead let the market value its currency, which almost certainly will induce a sharp rise in that currency's value relative to the dollar. In turn, China's exports will be more expensive for dollar-based consumers in the U.S. That, the politicians tells us, will help convince Joe Sixpack scale back his buying of TVs and t-shirts manufactured in Shanghai.
The bottom line: the narrowing of the U.S. trade deficit will persist, this school of thought counsels. Indeed, China accounts for about one-quarter of the trade deficit logged in this year's first quarter, so any downturn in Chinese exports to these shores will also pare the red ink in trade.
But there's reason to wonder if forcing a sudden revaluation of the Chinese yuan will automatically deliver an easy boon to the U.S. economy in the form of lesser Chinese exports to America. In fact, letting Mr. Market value the yuan may do nothing to trim the U.S. trade deficit, or so advised Fed Chairman Alan Greenspan on Friday. Limiting Chinese exports by force or otherwise will just redirect demand for importing to other suppliers, he explained at the Economic Club of New York, according to Reuters. "So essentially what we will find is we are importing from a different area but we'll be importing the same goods," Greenspan predicted. "The effect will be a rise in domestic prices in the United States and as a consequence of that, we will have other impacts…."
It's interesting to note that while the maestro's stated subject in his Friday address to the Economic Club was energy, a Reuters writer on the scene relates that no energy questions were forthcoming after Greenspan's speech. The world of currencies, by contrast, was a topical subject at the conclave. The dollar apparently is clearly the new hot topic, even as the greenback rises and pulls back, at least for the moment, from what some thought was the forex equivalent of the abyss.
In any case, the U.S. is forging ahead with its yuan plan, or so it appears. China will be made to do the "right" thing one way or the other. On that score, U.S. Treasury Secretary John Snow yesterday named the new point man to push America's cause for a yuan revaluation. Meanwhile, criticism in the U.S. Congress aimed at China is on the advance. To cite one example, courtesy of the Courier-Mail in Australia: "There has never been any good faith on the part of the Chinese to act in a way that is fair, that honors the opportunity that we give them to grow their economy by using our markets for that growth," the Democratic Minority Leader Nancy Pelosi charged last week.
Such talk is neither uncommon in Washington these days, nor is it being ignored in Beijing. Indeed, China last week announced it was raising textile tariffs on its domestic exporters by 400% on 70 products, reports Chinadaily.com. America wants higher import prices and by golly it's going to get them.
Perhaps that's better than a trade war, although we don’t completely dismiss that possibility yet until and unless tempers in Congress cool and certain members of the Bush administration rethink their foreign currency policy. But don't hold your breath.
Meanwhile, we'll leave it to the dismal scientists to revamp their econometric models and tell us whether the political events of the moment will narrow the trade deficit in coming months and thereby boost GDP.
Posted by jp at May 23, 2005 7:17 PM
Despite all the neighsaying, the economy has been clicking along at over 3% for awhile. I think those Euro central bankers would fall on their swords for such a rate.
I'm just watching those jobs numbers for signs of overheating. I think that's the biggest danger out there right now.
Posted by: muckdog at May 24, 2005 6:49 PM