United States GDP Growth: 2.8%? 2.0%? 1.7%?
Against all shutdown/debt ceiling related odds, the United States GDP grew 2.8% in the third quarter. Recent economic forecasts had been for 2%. The GDP report showed “imports dropped in the third quarter, and the improved trade balance along with rising inventories lifted growth overall.” Some bears still point to the weakness in consumer and business spending as a headwind for GDP growth going forward. Inventories contributed about 0.83% of the 2.8% GDP growth. Also, Caroline Baum searches for signs of liftoff from the “core” 2.0% GDP growth and finds that year-over-year “residential investment was up 15.3 percent in the third quarter while spending on durables rose 7.6 percent.” These sectors are typically leaders in the business cycle as they are sensitive to interest rates, therefore they are weighted more prominently in the Index of Leading Economic Indicators. Caroline ends with this: “Almost five years of zero-percent interest rates, about $3 trillion of asset purchases by the Federal Reserve and lots of forward guidance on both, and the US economy still can’t get out of its own way. Whatever else the Fed decides, tapering asset purchases isn’t in the cards any time soon.” Could she be talking about the Zero Lower Bound? (see below)
I Think We’re Turning Japanese: Whispers of Deflation and the Zero Lower Bound
The whispers of “deflation” have spooked the European Central Bank into cutting its main rate to a record low this morning: from 0.5 to 0.25%. Sending rates even lower will likely weaken the euro to the dollar and give a boost to European exporters. Meanwhile, Britain’s central bank kept interest rates unchanged at 0.5% on signs that the country is gaining momentum in their recovery. The Bank of England has set an unemployment target of 7% (currently at 7.7%), yet some question whether the recent gains in construction, services and housing activity suggest that the BOE should adjust its forward guidance. Meanwhile, German manufacturing got a significant boost in September(Alt) from high demand on ships, rail and aviation equipment. Orders increased 3.3%, with foreign orders jumping 6.8% from August. Capital goods orders from the Eurozone also screamed up 23.6%. Also, ECB President Mario Draghi had this to say: “I don’t think [the current situation in Europe] is similar to Japan.” Tell it to these guys, Mario. Several Japanese economists are arguing that Europe is making the same mistakes as Japan in the 90s: “First, policy makers failed to beef up banks’ capital cushions and force them to clean up their balance sheets…Second, they failed to undertake structural reforms that were needed to boost economic growth, mistaking the country’s problem as purely a cyclical one.” Finally, a new paper from the Federal Reserve indicates that the Fed is considering adjusting their forward guidance targets, which brings us to the next spooky whisper: “zero lower bound.” “Conventional wisdom is rapidly shifting to the view that the Fed will soon reduce its unemployment rate threshold to 6.0%,” and “even if the Fed were to augment its forward guidance by changing to a 3% inflation target or a nominal income target…the odds of falling back to the zero lower bound in the next recession are quite high.” If you want to know what it’s like to be at the “zero lower bound,” just ask Japan.
Boeing is proposing some “favorable economic incentives” from Washington lawmakers and their Machinists union in exchange for “the largest aerospace expansion project” Seattle has seen in a long time. The union will have to agree to a new 8 year contract with substantial pension and health-care cuts, while Olympia will have to agree to an “extension of Boeing’s tax incentives through 2040; a massive $10 billion 10-year transportation package; actions to streamline industrial permitting; education and training initiatives; and a compromise that will satisfy Boeing on the state’s pending water-quality rule.”
Investors “may need to redraw their mental maps of overseas markets. Many long-held assumptions about emerging markets no longer apply five years after the crisis.” For example: emerging markets are no longer driven by commodity-oriented sectors such as energy and materials, growing numbers of wealthy consumers and disposable income is fueling an increase in branded consumer-goods companies, and financial services is expanding faster in the developing world.
Foreign banks looking to operate in India will find they have an easier time thanks to new banking rules announced yesterday. “The rules are giving foreign banks a level playing field to compete with the domestic banks in terms of network, in terms of access to local markets.” The level playing field should translate to “equal treatment of branch-expansion plans by regulators and the potential to more easily buy Indian banks.”