Survey data always needs to be taken with a grain of salt. What people say they will do – or how they feel – does not always correspond to their actions.
But there is little doubt that many Americans, including both average consumers and business leaders- are notably less confident about the economic outlook than they were earlier in the year.
The Conference Board today released its monthly report on consumer confidence, showing a plunge in September from 53.2 to 48.5, its lowest level since February. Meanwhile, the Business Roundtable also published its quarterly CEO outlook, and many American business executives expressed caution about hiring and investing.
Data from the regional Federal Reserve Banks have added to the downbeat mood in recent days, particularly when it comes to one of the drivers of economic growth during this recovery: manufacturing. The Richmond Fed today said manufacturing activity in the mid-Atlantic region pulled back for the first time in seven months,
The premiums investors demand to hold Irish or Portuguese bonds instead of German have now passed the levels that precipitated the Greek bail-out.
Bond spreads reached 453bp for Ireland and 441bp for Portugal in trading today – higher than Greek bond spreads were in late April, just before they headed toward 800bp.
Greece’s government faces angry protests over budget cuts; Germany’s faces them when it spends a lot of money. According to Bloomberg, Angela Merkel, chancellor, has just renewed her support for the controversial “Stuttgart 21” rail project, which at a cost of about €4bn and using lots of drilling machinery, will change the southern Germany city’s main railway station from a terminus into a through station. The protestors’ objections are multifaceted but one of them is that it is a waste of public money.
Ms Merkel argued in Berlin that the project was a test of German reliability. If the protesters succeeded in halting Stuttgart 21 then “my Greek colleague” would argue he could not carry out planned deficit cuts because of the protests in his country, the chancellor said.
Adam Posen, an external member of the Monetary Policy Committee, has just sounded the alarm: not about a temporary double-dip recession, but about Japanese-style prolonged economic weakness, high unemployment, trade conflicts, and extremist politics. It is strong stuff. Monetary policy needs to do more to foster a stronger recovery, he says. Now.
His argument is worth reading in full because it is directed much wider than solely to other MPC members in the UK.
The one sentence summary. Policymakers should not settle for weak growth out of misplaced fear of inflation.
In a paragraph. Mr Posen believes output is clearly below any reasonable measure of potential, so worrying about an inflation problem is absurd. We must also not underestimate the potential for the economy to grow. If we do, that will destroy workforce skills and potentially productive machinery as well as inhibiting investment, creating a self-fulfilling bad outcome.
East Asian currencies are anything but stable viewed against the dollar: the Thai baht recently topped a 13-year high – and the yen and ringgit have both outpaced the baht’s rise so far this year. Viewed against each other, of course, these appreciating currencies are more stable.
New research challenges the habit of viewing all currencies against the dollar. It goes on to suggest that “considerable regional currency stability” can be achieved in east Asia if countries target the same basket of currencies as each other – even with no “explicit co-operation”.
China’s currency policy between mid-2006 and mid-2008 should be seen in this light, the paper argues; the simple view of the renminbi against the dollar does not explain the facts nearly as well. “The RMB behaved in this two-year period as if it were managed to appreciate gradually over time against its trade-weighted basket of currencies,” argue Guonan Ma and Robert N McCauley of BIS.
There are two massive fixed exchange rate blocs operating in the world economy today, and both of them face severe strains and conflicts. The eurozone is beset by problems which are typical of fixed rate blocs in the past, with the main surplus country (Germany) refusing to increase aggregate demand, thus forcing the deficit countries to reduce demand in order to stay within the currency arrangement. This, they appear willing to do, or at least to try.
Meanwhile, the China/US bloc also has a (nearly) fixed exchange rate, and once again the surplus country (China) is refusing, or is unable, to expand domestic demand enough to eliminate the trade imbalance. But, in this case, the deficit country (the US) is increasingly unwilling to accept the consequences, and is adopting policies which are designed to break up the bloc altogether. Two blocs with somewhat similar problems, but very different responses and outcomes for the deficit countries.
In making this analogy, it is of course important to accept that the institutional arrangements surrounding the world’s two major blocs could hardly be more different, with the eurozone established as a single currency area, while the Sino/US bloc is officially a linked but flexible exchange rate area. But the critical feature of both areas is that nominal exchange rate adjustments are not permitted to equilibrate trade imbalances within either of the two blocs, so a persistent pattern of large current account imbalances has emerged. Germany and China are the two economies where chronic surpluses have emerged, while the Club Med economies and the US have the corresponding chronic deficits.