Michael Brandl > Macro Updates > Archives > June 1, 2003

June 1, 2003

Another “Consumer-driven” U.S. expansion? With geo-political uncertainties winding down (the war in Iraq coming to an end, the rebuilding of Afghanistan under way, the Palestinians and Israel talking, North Korea…well…being North Korea) attention turns back to the weak U.S. economy.

The Commerce Department revised U.S. real GDP annualized growth for 2003Q1 up slightly from 1.6% to 1.9%. As before, most of the growth has come from consumer spending. While the 1.9% is better than the 1.4% in 2002Q4, it is still not great. We would prefer the real rate of growth to be in the mid-3% range. So we have a way to go yet. Technically this not a recession, but it is not a booming economy either.

On the positive side, the Conference Board reports that Consumer Confidence reached a six-month high in May. We also see the housing market rocketing forward. Let’s see if this consumer confidence will spill over into other sectors of the economy.

Business spending remains weak however. Durable goods orders fell surprisingly in April. Even the more technical, but often more reliable “New orders for nondefense capital goods excluding aircraft” fell in April, after increasing in March. For this economic expansion to pick up steam Business spending level must improve. Keep an eye on business confidence levels and corresponding business spending levels. The equity market seems to think an economic pick-up is around the corner…we shall see.

G-8 and the FX market. Watch the final statement that comes out of the upcoming G-8 summit in France. It may take a bit of reading in-between the lines, but it will be interesting to see what the Europeans think of the recent raise of the Euro against the dollar. The Bush administration, in the form of Secretary of the Treasury John Snow, has basically shrugged their shoulders at the situation. Snow has even suggested recasting what a “strong currency” means. He prefers to place emphasis on how a currency functions as a medium of exchange as opposed to the more traditional use of the word, which focuses exclusively on it’s price in the FX market.

What’s going on here? Perhaps it is a political play. A weaker dollar will help American manufacturing exporters in key electoral states such as Michigan, Ohio, and Illinois. But, a weaker dollar will surely hurt the already weak economies of Japan and Europe. Also, might a falling dollar (it has fell 20% against the Euro in the past year) go into a free fall? Thus, some argue, this neglect of the dollar in the FX market could trigger worldwide deflation. Perhaps the Europeans will put pressure on the Bush Administration to do more to prop up the dollar to fend off a world wide financial crisis.

I tend to doubt these doomsday scenarios. The FX market is to be sure, very erratic and often illogical. Perhaps the FX market is driven far too much by short sighted, “animal spirit,” driven traders (to borrow a phrase from a certain dead economist). Currencies seem to appreciate and depreciate for “no good reason.” Just ask the Brazilian about this! Despite the US current account deficit, I think the dollar will bounce back, especially against the Euro. But then again…what do I know?