RIYADH, 12 July 2004 — Is the US recovery running out of steam? Financial markets certainly seem to think so. Rising oil prices, a negative tone in some recent economic data and some lower-than-expected corporate earnings — particularly in the technology sector — seem to suggest a slowing down. US and European stock markets ended higher last Friday, but lower on the week as a spate of corporate profit warnings from technology companies sparked concerns.
Last week, there was some unexpected weakness in employment data, factory orders, construction spending and the Chicago Purchasing Managers’ Index (PMI). Last week, with few major indicators released, we saw weakness in the ISM Services index and wholesale inventories.
The apparent slowdown has become a subject of much discussion, poised as it is against the background of the first raise in interest rates by the US Fed in four years. In its latest report, Morgan Stanley says that its Business Conditions Index (MSBCI) fell by a near-record amount to a level not seen since last summer, primarily due to the increase in energy prices.
The latest Blue Chip survey of over 50 economists show that analysts have revised downward their US growth forecasts for this year, again blaming rising energy prices.
Ten-year Treasury yield, a barometer of inflation and economic growth, retreated last week despite the US Fed’s rate increase, suggesting that bond markets are rolling back their perception of the pace of economic growth. With Europe and Japan trailing behind, a sputtering US economic engine is not good for the global economy.
If the jury is still out it is, first, because a great number of indicators are still strong. Second, despite the Fed increase, interest rates still remain close to historic lows. Third, the fiscal stimulus on the US economy remains considerable, and, more importantly, this is an election year. Fourth, even though analysts have singled out high oil price as the favorite culprit threatening to derail growth, Saudi Arabia has shown through its recent actions that it will not allow oil prices to go beyond a certain limit. Finally, any slowdown in the economy is bound to reduce the Fed’s pace of interest-rate tightening. On balance, I remain cautiously optimistic that, so far, there have been no real signs that the global economic recovery is about to reverse.
This week will see a raft of economic indicators that may provide further clues. These include the core CPI — a number believed to be watched critically by Fed Chairman Alan Greenspan — retail sales, industrial production, capacity utilization and the preliminary Michigan Sentiment number. (Khan H. Zahid is chief economist and vice president at Riyad Bank. He is based in Riyadh.)