US consumer confidence, current account deficit rise

The US economy continues to look upbeat even as economies elsewhere appear to slow.

Reuters reports that the University of Michigan's measure of consumer sentiment rose to 94.8 from 86.9 in May, its highest level since January.

"I think we are beginning to see a shift in the tempo of the expansion. Other variables have indicated that lately. We may see an acceleration," Bill Hummer, chief economist at Wayne Hummer Investments, was quoted as saying.

An acceleration in consumer spending would almost certainly widen the current account deficit. As it is, the current account for the first quarter, as reported by the US Commerce Department yesterday, shows a deficit of US$195.1 billion. The fourth quarter 2004 deficit was revised up to US$188.4 billion from the previously-reported US$187.9 billion.

Brad Setser projects that the annual deficit will be over US$800 billion for two reasons.

I still think the income balance will turn ever so slightly negative for the full year. And I expect the goods and services deficit -- 5.6% of GDP -- to widen over the course of the year, particularly if oil stays in the high 50s and if the dollar's recent rally is sustained. The large gap between the US import and US export base makes it difficult for imports to grow by much without widening the deficit, and I don't expect the relatively strong q1 US export performance to be sustained in the face of a rising dollar and a slowing world economy.

If the US deficit widens, Singapore probably wouldn't be contributing much to it. Singapore's non-oil domestic exports fell 5.6 percent in May, with exports to the US contracting 17 percent. Non-oil retained imports of intermediate goods contracted 5.0 percent, indicating that exports are likely to continue falling in the months ahead.

There are also signs of cooling in Europe. Inflation in the European Union was down to 1.9 percent in May from 2.1 percent in April. Industrial production in the European Union edged up 0.6 percent in April. Although this reversed the falls in the previous two months, industrial production has essentially been flat over the past year or so.

The apparent strength of the US economy remains a relative oddity among the developed economies. Little wonder that its current account deficit continues to widen.