The U.S. balance of trade slipped to another all-time deficit in February–$61 billion vs. $59 billion in January, reports the U.S. Census Bureau. If you thought the news would take a hefty bite out of the dollar, you were mistaken. By the close of Wall Street trading today, the dollar gained ground against the euro and yen.

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Not everyone’s worrying that rising crude oil prices will impair economic growth, but you can count the bond market in as one more pessimist.

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It’s clear that the dollar’s been falling, but what does it mean, Horatio? What does it mean? Different things to different people, comes the reply from the financial gods on high.

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It’s not every day that a president raises questions about the bonds issued by his country. Thanks to competition, a government tends to give the other guy’s debt a hard time in one way or another.

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If you thought the subject of oil was a bit far afield for the steward of the nation’s money supply, think again. As Alan Greenspan rides into the sunset of his final months as head of the central bank he told the National Petrochemical and Refiners Association conference in San Antonio, Texas yesterday that market forces should be allowed to prevail when it comes to the price of oil.

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The bond market hardly needed another smoking gun, but it got one just the same today when news hit the streets that the government was taking away the floating interest rate on EE Savings Bonds.

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Fed Governor Ben Bernanke, a Princeton University economist, champion of inflation targeting, and defender of the central bank’s recent war to fight an alleged deflation, has been nominated by President Bush to chair the Council of Economic Advisers. In light of the news, does Bernanke now jump onto the fast track for succeeding Fed Chairman Alan Greenspan, who by law must step down from that role on January 31, 2006.

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“The price of gasoline and oil is a reflection of problems that have been decades in the making,” U.S. Energy Secretary Samuel Bodman said earlier in the week after a demonstration of hydrogen-powered car, according to Dow Jones via Rigzone.com.

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The dollar bulls are hoping (some may even be praying) that the economists at the Levy Economics Institute of Bard College (LEI) are wrong.
Yes, the U.S. economy enjoyed four-percent-plus growth last year, a new paper from LEI concedes. But don’t let that fool you, the report goes on to effectively say. The prospects for growth are dimming, and the “stark choices” facing the consumer is the gremlin in this machine.
LEI’s outlook boils down to this: consumers can’t spend more without taking on materially higher risks, but neither can they pull back without threatening recession. Damned if they do, damned if they don’t.
U.S. consumers, who’ve collectively amassed a record mountain of debt, are at or near the point where even the prospect of low financing may not be enough to trigger the purchase of a new personal computer, widescreen television, SUV or that summer home on the coast that the family’s always wanted. Or so LEI’s economists believe: “If [consumers] continue piling up new debt,” they write, “the combination of their rising debt burdens and rising interest rates will produce rapidly increasing and unsustainable ratios of debt service to income. A jump in personal bankruptcies and a sharp drop in consumer spending will be inevitable.”
We’ve all heard that one before, and a few others, and to date nothing’s come of it. Should we continue to remain nonchalant? Or is it time to bury bars of gold and spam in the backyard?
The future isn’t that bad, by LEI’s reckoning; then again, it isn’t all that good either: “If
households recognize that they cannot go much further in mortgaging their incomes to debt service, they will begin to cut back on further borrowing and slow down their current spending.” This, we’re told, is the more likely outcome of the two scenarios. “Furthermore, a new Washington and Wall Street consensus, encompassing the view that it is important to increase personal saving, is emerging in response to recent speeches by Federal Reserve Chairman Alan Greenspan, other Federal Reserve governors, and administration officials.”
Is fiscal prudence about to be imposed upon us by necessity? God help the K-mart shoppers.
Of course, evidence for LEI’s prediction may be less than imminent. The decline and fall of Joe Sixpack as a shopping entity is a losing forecast, and one with the lengthy history to prove it. And once again, there’s a fresh reason to wonder when Joe will succumb, if ever, to the fate that so many see for our middle-aged her. Consider this morning’s
Bureau of Economic Analysis release that revealed that personal income in February rose $33.2 billion, or 0.3 percent, while disposable personal income advanced $29.6 billion, or 0.3 percent.
Consumers, it seems, continue to confound the experts and spend what they earn. In fact, they’re spending more than they earn, and therein lies the problem, or so goes one line of thinking. But the other shoe has yet to drop, and in fact both shoes have been purchased on zero- and low-interest credit cards. Indeed, same-store retail sales in February rose 4.9 percent from a year earlier, the International Council of Shopping Centers announced earlier this month, based on results at 69 chains, Bloomberg News reports.
And Joe, if he’s like many lucky consumers with mailboxes, receives more than his share of credit card applications–applications that promise fresh plastic no matter one’s credit history. How’s LEI ever going to find intellectual satisfaction if credit card companies keep extending credit to consumers who can’t afford to pay off the debt they’ve already accumulated?
Then again, one month a trend does not make, and so the latest personal spending numbers should be used cautiously. But a decade or two certainly makes for more compelling evidence, doesn’t it? America’s love of buying is no recent fad. Breaking the habit, as such, won’t come easy, especially when there’s no real effort at the Fed, or Visa or MasterCard, for forcing the overextended victims to go cold turkey.
That doesn’t mean the consumer can’t mend his ways, or that personal financial probity won’t reverberate in the form of recession in the economy at large. But, we might ask, when might the day of reckoning arrive? And under what circumstances?
Everyone’s offering a theory of course, but for the moment let’s stick with LEI’s: “The personal consumption spending machine, including household investment, again raced ahead of personal income in December 2004, but its growth is unsustainable and likely to stabilize or even fall in 2005….”
This year, in short, threatens to be a pivotal one for consumer spending trends, LEI warns. What could be the trigger for the new world order? It’s any one’s guess, obviously. But considering how long consumers have been spending, and how much debt they’ve racked up, it’s not inconceivable that the game could roll on for longer than reasonably minded economists expect.
In surveying the potential catalysts for change on the consumer front, energy once again rears its ugly head, gasoline in particular. But before we go off the deep end (again), it’s worth considering just how much of a financial impact $2.00 a gallon gas has on consumers. Less than the casual observer might expect. On that subject, Legg Mason today runs off a bit of statistical perspective:

Consider that the average driver in the U.S. puts about 12,000 miles on their vehicle in a given year…. In addition, consider that the average vehicle gets somewhere around 18 miles per gallon, leaving us with an average consumption of roughly 650 gallons of gas a year. At $2 a gallon, the average capital consumers must allocate towards gasoline a year is roughly $1,300. Because gasoline is considered an inelastic good, meaning consumers will use the same amount regardless of the price, if gas prices increase 10% to $2.20 a gallon, the average amount spent will increase to $1,430. How significant of a factor is $130 a year? With an average per capita income in the U.S. of $31,500 in 2003, $130 is less than half of one percent. While it is certainly shocking to see gas at $2.20 a gallon, the overall impact to the economy and consumers themselves is really not too shocking.

If no one’s shocked at $2.20, maybe $3, $4 or even $5 a gallon might do the trick. Too far-fetched you say? Perhaps, although parts of Europe already pay such prices, and it has nothing to do with Opec. Is it relevant that consumption in Europe is something less than robust by American standards. Regardless, some governments on the Continent have ruled that it’s in the best interest of their respective economies to hike up the price of gasoline by political means, above and beyond what a free and fair market would otherwise charge.
Nothing’s imminent in the U.S. on that front, at least for the moment. Then again, one never knows what a government, any government will do given the right–or should we say wrong?–context. Or, as John Huston’s character in Chinatown tells Jack Nicholson’s Jake Gittes: “You see, Mr. Gits, most people never have to face the fact that at the right time and in the right place they’re capable of anything.”
Of course, if Goldman Sachs keeps coming out with bullish predictions that crude oil may be poised for a “super spike” that will run up a barrel to $105–as the investment bank did today–governments may be out of job when it comes to manipulating energy prices upward. Indeed, the prognostication helped drive the price oil up today over $55 a barrel after declines in previous sessions. Perhaps there’s still hope for persuading the consumer to stay home and read a book. Just be careful what you wish for.

The naybobs of negativism have a tough time these days when it comes to predicting the demise of growth. The final tally for GDP’s fourth-quarter expansion came in at a 3.8% annualized real rate of increase, the Bureau of Economic Analysis reports today. That’s a bit lower than the consensus outlook of 4.0% that economists expected, but a respectable advance nonetheless. Indeed, 4% to 5% is the average annualized GDP growth rate (based on quarterly data) that’s prevailed over the past ten-plus years, and so it’s not out of bounds to say that the economy’s close to advancing at its average pace.
And the momentum looks set to continue, by some accounts. “The economy at the moment has a pretty good tail wind,” Anthony Chan, senior economist at JP Morgan Asset Management, tells BusinessWeek today. Some economists expect this year’s first quarter GDP will rise by around 4%. If that holds up, when the government’s first estimate of the January-March period hits the street on April 28, the labor market will show respectable gains too, Ken Mayland predicts in the same BW article: “We are going to produce better growth on the job front,” says the president of ClearView Economics.
Mark Vitner, senior economist at Wachovia Securities, thinks the first-quarter GDP will rise by 3.9%. “Real final sales were revised up slightly to a 3.4% annual rate in the fourth quarter, reflecting less inventory building than previously thought,” he writes today. “With inventories already lean relative to sales, production now appears set for slightly stronger gains in 2005.”
What’s driving GDP? As usual, the consumer plays no minor role. Joe Sixpack has been busy handing his credit card around town. We know that because we see him at the malls, the car dealers, and audio shops. He’s not quite sated, and there’s one more credit card application waiting for him in today’s mail. Par for the course. “The major contributors to the increase in real GDP in the fourth quarter were personal consumption expenditures, equipment and software, and private inventory investment,” BEA reports.
Presumably, Joe will be at the forefront of any first-quarter GDP advance as well. But it’s an open question if the stock market sees the same future unfolding. The S&P 500 has slipped 2.5% so far this year. That’s hardly a ringing endorsement of the notion that the economy has continued to hum along this year. True, earnings have been quite strong in recent quarters, but on a valuation basis the trailing price-earnings ratio remains stuck around 20, or roughly where it’s been since last summer.
The view from the equity markets doesn’t get any better if you break stocks into growth and value components. The Russell 1000 Growth Index (a proxy of large-cap growth stocks) is off more than 8% year to date. That’s a steeper fall than the 5.6% loss YTD for the Russell 1000 Value Index, and more than two times the red ink logged by the broad market, measured by the S&P 500.
So what’s an optimist to think? Perhaps he can start with some questions. How about this teaser: Shouldn’t growth stocks be taking the lead over value stocks if the economy is advancing at a healthy clip? Or, are we to conclude from the recent meanderings of the major indices that Mr. Market has stumbled in connecting the macro-economic dots to equities.
Clearly, the stock market was encouraged today by the drop in oil prices and the confirmation that the fourth-quarter GDP exhibited decent growth. But additional declines in oil are needed to inject more life into stocks. Meanwhile, the consumer needs to keep spending. The two may be connected to a degree that some investors aren’t yet willing to accept.
By one measure, there’s reason to wonder if consumers are willing to forge ahead with purchases above and beyond current levels given the still-uneasy outlook for energy prices. “It’s clear that concerns over prices — especially gasoline — are hitting consumer confidence hard,” says Jerry Thomas, president and CEO of Decision Analyst, which today announced that its U.S. Economic Index fell to its lowest since last October. “As long as consumers remain uncertain about the cost of such an essential commodity, it’s hard to see a strong performance for the economy.”
It’s even harder to see the stock market barreling higher without a material fall in energy prices. Indeed, when it comes to energy, gasoline prices offer a closer measure of how consumers will be thinking in the near future. On that score, there’s reason to stay cautious, despite today’s drop in crude oil prices. Gasoline futures, in short, keep flirting with new highs. The sell-off in crude, in other words, has yet to carry over into gasoline. Or do we have that backwards: the sell-off in crude has yet to catch up to gasoline?
Deciphering a proper answer may not be imminent in the divergent paths of two the two fuels. Consider today’s confusing signal in the latest inventory reports from the Energy Department. Crude oil stocks continue to rise, and now reside in the upper half of the average range for this time of year. “Everyone who can produce oil is pumping whatever they can because of these high prices,” John Kilduff, senior vice president of energy risk management with Fimat USA, tells Bloomberg News. But gasoline supplies fell, surprising many analysts who thought a rise was in the offing. Was that just an anomaly in a marketplace where gasoline stocks are otherwise building? Or was today’s gasoline stocks’ drop a sign of continued stress on the nation’s aging, and increasingly overworked refinery system?
For the moment, gasoline’s bull market is offsetting crude’s decline. Crude futures, after dropping sharply, rallied near the end of the session. Crude v. gasoline. Who’s right? Who knows, but we’ll soon find out, and the implications will be something more than trivial for the consumer, and thereby the economy and the stock market. Welcome to the other conundrum.