If we look at recent US economic releases, we can clearly see that one factor is dominating the overall economic picture. Geopolitical risks, especially war fears are responsible for the current economic uncertainty on the whole market. Mixed data were presented. On the one hand we have seen a surge in the November trade deficit, a drop in December industrial production and a dip in January University of Michigan consumer sentiment. All these releases fell short of expectations. In contrast we have seen encouraging labor market figures as well as a Philadelphia Fed index consistent with a 50+ reading in the national purchasing manager index (PMI). Which picture tells us the truth? Let us look more into details.
The Philadelphia business report showed some positive signs. It reported that manufacturing in the region is showing some improvement. Especially new orders (in line with the ISM survey) and shipments rose much, while inventories fell steeply.
The steady reading of 11.2 of the Philly Fed’s current activity index suggests that the ISM national index is likely to remain above 50 in January, indicating that US economy will keep its growth at around 4 percent.
Separately, the number of continuing claims for unemployment decreased 136,000 and the number of new jobless fell to the lowest level in six weeks, suggesting the weakness in the job market is ebbing. However it has to be also said that this time of the year is characterized by a very high volatility in the jobless claims data, because of the holidays. Therefore we should be careful in viewing this as evidence of an improving labor market.
The first “sluggish” tone came from the Fed’s Beige Book, characterizing the economy between mid November and beginning January as expanding at a subdued pace. Firms remain very cautious about hiring but manufacturing activity appears to have picked up slightly. Housing activity remains strong but we think, we will see the beginning of a slight cooling.
Going on with industrial production, it fell a disappointing 0.2 percent in December. Production fell for a second straight year. Companies are still reluctant to spend on new equipment and hiring, confirming the Beige Book’s view.
As well as from the consumer side, there are no positive news to mention. Confidence dropped in January, falling to 83.7 from 86.7 in December, this due to war fears, income and job concerns. Expectations led the fall back, showing that the new economic stimulus package did not had its helpfully impact for economic growth or personal finances. Meanwhile current conditions were essentially unchanged.
Furthermore the November trade gap reflected rebounds in both exports and imports comparing with October figures with imports rising by a larger amount. This lead to a record $40.1 billion trade deficit following a $35.2 billion in October. The deficit may stay wide in coming months, despite a weak dollar stimulating exports, as stronger economic growth in the US boosts demand for foreign-made goods.
Summarizing these mixed economic releases, the message we can derive is clear. It is a question of the time period! We see in fact weaker figures at the moment, mainly due to geopolitical risks. So we expect that GDP growth for the current quarter should be modest at 2.5 percent. However, we have not altered our view that growth will strengthen looking forward.
(The information contained herein is for information only and should not be construed as an offer or a solicitation to purchase, subscribe, sell or redeem any investments. While Clariden Bank uses reasonable efforts to obtain information from sources, which it believes to be reliable, Clariden Bank makes no representation or warranty as to the accuracy, reliability or completeness of the information)
Arab News Business 3 February 2003