Saturday, 17 September 2005

Post-Katrina US economic indicators and Q2 current account deficit

More indicators on the post-Katrina conditions in the US are arriving and they appear to be confirming expectations of a slowdown.

Reuters reports on the Economic Cycle Research Institute's weekly leading index...

A jump in initial jobless claims after Hurricane Katrina caused a leading index of the U.S. economy to slip in the latest week, a report said on Friday.

The Economic Cycle Research Institute, an independent forecasting group, said its weekly leading index edged down to 135.3 in the week ended September 9 from a downwardly revised 135.8 in the prior week.

The index's annualized growth rate eased to 2.9 percent from 3.1 percent.

... as well as on the University of Michigan's consumer sentiment index.

The University of Michigan's closely-watched consumer sentiment index fell to 76.9 in September from 89.1 in August, far below Wall Street forecasts and the 81.8 hit after the September 11, 2001, attacks on New York and Washington.

The current conditions dropped to the lowest level since December 2003 while the expectations index plummeted to the lowest since February 1992.

The report also covered the US current account deficit for the second quarter.

[T]he Commerce Department said the U.S. current account deficit narrowed in the second quarter to $195.7 billion, but the previous quarter's record deficit was revised even higher.

The quarterly shortfall, the second highest on record, compared with Wall Street forecasts for a deficit of $193.0 billion. The first quarter gap was revised to a record $198.7 billion from the initial $195.1 billion deficit...

The quarterly current account deficit ran at 6.3 percent of gross domestic product in the second quarter compared with 6.5 percent in the previous three months.

Brad Setser analysed the current account data, as well as the TIC data for July, also released yesterday. I thought the following is worth highlighting.

[T]he US continues to earn far more on its direct investment abroad ($120 b in the first half of 2004) than foreigners earn on their direct investment in the us ($62.5 b). The US has a bit more direct investment abroad and foreigner have investment in the US, but not two times as much. The US just gets more income from investing abroad than foreigners get (or report?) on their investment in the US. I don't quite see how the low realized return on direct investment in the US offsets the exchange rate risk associated with investing in a major deficit country ...

However, the IMF provided a different perspective in its recent World Economic Outlook report. The Economist provides a summary of the perspective.

... Emerging markets saw a return on aggregate capital of 13.3% over the 1994-2003 period, compared with 7.8% in the G7 group of industrialised nations. But investments in emerging markets are riskier, because their economies tend to be more volatile and their institutions weaker.

Moreover, the return on aggregate capital may not be a good guide to the returns that investors can actually expect. Growth could be concentrated in smaller firms that are harder to invest in, for instance, or the data could be unreliable. Indeed, the IMF’s analysis suggests that the internal rate of return on invested capital in publicly traded firms in emerging markets has been very poor over the past decade, even before currency risk is taken into account.

Perhaps this is one reason the IMF also found that investment in emerging Asia has fallen in recent years. And this is important to the US because the IMF also believes that an "investment recovery in Asia (excluding China) and oil-producing countries would offer a significant contribution to the resolution of current account imbalances".

Along these lines, Ben Carliner thinks that the Asian Bond Market Initiative may help re-direct some of Asia's savings to fund domestic investments.

Domestic Asian bond markets...will provide opportunities for Asian savers to invest at home... [I]n the medium to long term, deep and liquid capital markets in East Asia could fundamentally reshape the international financial landscape and provide a mechanism for unwinding the global savings imbalance.

And Morgan Stanley economists Stephen Roach and Richard Berner think that recovering economies in Japan and Europe will also divert funds away from the US, although colleague Stephen Jen does not.

Who is likely to be correct? Let's go back to the IMF for clues. According to the FT:

The International Monetary Fund has become increasingly pessimistic about the prospects of Europe's economies while raising sharply its forecast for Japan. In a draft of its twice-yearly forecasts, seen by Financial Times Deutschland, the fund highlights the vulnerability of European economies to oil price shocks.

... It still believes Germany will grow by a sluggish 0.8 per cent this year [but] it has cut its forecast for 2006 to 1.2 per cent from 1.9 per cent.

For France...the IMF expects a growth rate of 1.5 per cent this year, compared with 2.0 per cent in its April forecasts. The 2006 forecast has been revised down from 2.2 per cent to 1.8 per cent.

In Italy, suffering a recession, zero growth is expected this year, compared with the 1.2 per cent the IMF originally expected.

Predictions for the UK have been revised down to 1.9 per cent in 2005 and 2.2 per cent next year, compared with previous forecasts of 2.6 per cent for both years.

In contrast, the IMF believes that Japan's economy will grow by 2 per cent this year and in 2006...

The US economy...growth hardly changed from that in April, the IMF expecting growth of 3.5 per cent in 2005 and 3.3 per cent in 2006.


brad said...

most US FDI is in europe (including the UK), canada and to a lesser degree japan, most FDI in the US is from europe, canada and Japan. so the US data is more a "relative returns in industrial countries" issue than an em v. industrial countries issue. i recommend the work of philip lane on this question.

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