Research Dept. News
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Monthly Report, num 285 - November 2005
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International review - United States
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United States survives hurricanes and energy crises, for the moment
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United States maintaining economic activity and energy prices not shifting to other sectors.
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The vitality of the US economy seems able to survive anything. The effects of hurricane Katrina on the level of economic activity have been much less than initially expected. So far as concerns prices, that is another story as one thing adds to another. The hurricanes have put pressure on already high energy prices bringing about a notable rise in inflation. This rise, however, is not shifting to other sectors of the economy. At this time, the worst effect of the rise in oil prices is not in a reduction in growth nor in widespread inflation but in the increasingly worse state of a trade balance already in deficit.
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Retail sales remain strong with only a drop in car sales.
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On the demand side, the latest available indicators show that the effects of Katrina on consumption are turning out to be limited. In September, retail sales were strong. Apart from motor vehicles, a key but erratic component, retail sales were up by 10.3% over the same period last year and are showing a profile not simply holding up but presenting some increase. This vitality comes in contrast to the drastic drop recorded in the Conference Board consumer confidence index in September which went down from 105.5 points to 86.6. Naturally enough, the fears and doubts of the US consumer are being concentrated on durable consumer goods while at the same time people are holding strongly to the levels of consumption reached in other products.
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Industrial production remains weak.
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On the supply side, the industrial and manufacturing sector continues to be the ugly duckling of the strong US economy. In September, the poor growth of industrial production (2.0% year-to-year) falls within the marked downward trend taking place since the Spring of 2004. The truth is that the sector has had a weak and very short recovery compared with past periods. Nevertheless, business executives are seeing things with rather more optimism, as shown by the recovery in the manufacturing activity index put out by the Institute of Supply Management for August, which rose to 59.4 points, a level well above the 50 reference figure which indicates a predominance of optimists over pessimists. The non-manufacturing activity index went the other way with a drastic drop to 53.3 points, a loss which likely will be compensated in coming months.
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Strong real-estate market shows some signs of easing.
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The housing sector, one of the key players at this time, continues to show a broad picture of strength which also helps the consumer to maintain levels of consumption, whether by increasing the sense of wealth or by making access to borrowing easier. All indicators for the real-estate market continue to move up, especially the price of existing houses, which showed an increase of 16.2% annual in August. Nevertheless, while not changing the general picture, housing demand seems to be easing in some parts of the country. In this respect, the passing of Katrina, which has generated an increased need for building in shelter areas and for reconstruction, could be masking part of this slowdown, constituting a «soft landing» which would be looked kindly upon by the Federal Reserve.
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Employment being created but wages losing purchasing power.
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In the labour market, the US economy continues to create jobs. Some 35,000 jobs were lost in September, the first drop since May 2003. This decrease, however, quite small in itself, was much less than expected, if we take into account current circumstances. Furthermore, the figure for August was revised upward. Finally, the picture we are left with is that of a labour market undoubtedly quite vigorous. In spite of robust job creation, in September wages lost 2.4% of the purchasing power they had in the same period last year. The negative effect of this reduced spending capacity on retail sales is being compensated by the strength shown in housing. On the positive side, this wage moderation is helping to avoid inflationary pressures.
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Increased inflation holding to energy sectors, thanks to containment of wages and retail margins.
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Energy prices meant that inflation shot up to 4.7% year-to-year in September. This was a rate in line with the Nineties seeing that this level had not been reached since July 1991. In spite of this very notable rise, the effects on other sectors of the economy have been practically nil. In this respect, the core inflation component, which excludes energy and food, dropped slightly with an increase of 2.0% compared with 2.2% the month before. Wage moderation, mentioned earlier, is the main cause of the trend in the broad component of prices but not the only one. Producer prices for finished products went higher than consumer prices, going up by 6.7% year-to-year in September. In this case, the reduction in retail margins was the factor preventing such price increases from reaching the consumer. We may ask how long the containment of margins and wages will last but, for the moment, the sharpest effect energy prices are having is on as simple a matter as the trade deficit.
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High-cost oil increasing foreign deficit.
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The foreign sector is far from hitting bottom. Following a slight respite in the second quarter, it again sharpened its worsening state. Energy raised the price of imports and this sent up the trade deficit in August making it worse than July. The cumulative deficit for the past 12 months reached a record figure of 723 billion dollars. A return to more moderate levels in oil prices could bring about some reduction in the foreign deficit but the prospects are not going in this direction and it should be considered that US household savings represent only 0.3% of disposable income, which does nothing to help work against this sword of Damocles hanging over the US economy and its trading partners.
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