Retail sales help stoke u.S. Upturn

U.S. consumers turned in a surprisingly strong performance at stores, auto dealers, restaurants and other retail establishments in March, adding to a growing sense that the recovery could prove faster than widely anticipated.

Coming on top of a rebounding U.S. service sector, buoyant financial markets and new efforts to forgive mortgage debts, the 1.6% surge in retail sales is tempting forecasters to upgrade their assessments of the U.S. economy’s ability to restore the more than eight million jobs lost since the recession began.

To be sure, there is still ample concern the recovery won’t be strong enough to set off the virtuous cycle of rising employment and spending required for a robust expansion. With many consumers struggling under heavy debt burdens and banks pulling back sharply on lending, companies – particularly the small ones – could have a hard time finding the confidence or credit they need to expand. Most estimates of U.S. growth remain well below the 7%-to-8% level seen in the wake of previous deep recessions.

Optimists, though, see rising retail sales as a sign that the headwinds aren’t doing too much to hold back U.S. consumers, whose purchases account for about two-thirds of the U.S. economy and a fifth of global demand.

Meanwhile, the recovery in Asia is proving stronger than expected, with some countries posting double-digit growth rates, a trend that could help stimulate U.S. exports.

Worries about economic headwinds could actually help fuel the recovery, as Federal Reserve officials focus on supporting growth rather than heading off inflation. In a speech Wednesday, Fed Chairman Ben Bernanke signaled that the central bank isn’t likely to hit the brakes by rising interest rates anytime soon.

The Wall Street Journal April 2010

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Turkey lowers rate to 6.75%, citing gradual, slow recovery

Turkey’s central bank cut its benchmark interest rate by half a percentage point to 6.75% Thursday, continuing its aggressive policy amid booming sentiment toward emerging economies.

Bleak prospects in the labor market and easing inflation expectations suggest that Turkey’s rate cutting cycle isn’t over. Many analysts expect another cut in November and say that one may be the last for some time.

In a statement, the bank’s monetary policy committee said the recent data confirmed that the recovery in economic activity will be slow and gradual. It said overseas and domestic investment demand remains weak and that domestic demand is expected to become weaker after a significant increase in the second quarter.

The committee noted that there has been an improvement in the employment situation but said this should be monitored for a while to see if it will be permanent.

Conciliatory statements by Prime Minister Erdogan have stroked speculation that the government is close to a loan agreement with International Monetary Fund valued at as much as $45 billion.

Alternatively, the government is also mulling a plan to forgo the IMF’s help and boosting the privatization of state assets – including coveted electricity distribution companies – and extend an amnesty allowing Turks to repatriate savings held abroad.

Still, many analysts expect that an IMF safeguard would trigger a rating upgrade for Turkey, which would probably lead to lower risk premiums on the market yields of government debt. The central bank has explicitly said lower risk premiums allow for an extension of its rate-cutting cycle.

The Wall Street Journal October 2009

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China will soon overtake the U.S. as the world's biggest economy. Should Americans be concerned?

It is now a foregone conclusion that China’s economy will become the biggest in the world sometime very soon. According to the World Bank, the size of China’s economy is $10.1 trillion, compared with $14.6 trillion for the U.S., based on purchasing power parity (which adjusts exchange rates to account for the different prices people pay for goods and services across countries). But China is narrowing the gap in a hurry. Over the past 10 years, the annual real growth of China’s gross domestic product averaged 10.5 percent, compared with 1.7 percent in the U.S. The Chinese economy increased at an annual rate of 9.6 percent in the first half of 2011, vs. a rate of less than 1 percent in the U.S. America’s days as top dog of global output are numbered, at best.

Although economists are skeptical about China’s ability to sustain its current levels of growth, most agree it is only a matter of a few years before the Middle Kingdom’s 1.3 billion or so people produce more than the 310 million living in the U.S. Today, though the GDPs of the U.S. and China are roughly equal, the average person in China lives on an income that can buy only 16 percent of the goods and services of the average person in the U.S., and it will take decades for that gap to close.

Nevertheless, pessimists warn that being knocked off the top spot could still have all sorts of ill effects for the U.S. Being the biggest economy, they argue, has been vital to American prosperity because, since the close of World War II, the dollar has been predominant in international financial reserve holdings, allowing the U.S. to borrow and trade in its own currency.

But the impact of that change might be less than dramatic. It’s probably true that if the dollar loses its dominance, American companies will have to start hedging against exchange rate risk, and government borrowing might become a little more expensive. But foreign companies already have to hedge currency risk and yet still manage to compete, while less borrowing would surely be a good thing for the U.S. in the medium run.

Bloomberg Businessweek October 2011

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U.S. Workers’ Sliding Share of Pay Poses Spending Risk

Income gains in the U.S. are slowing and workers’ slice of the earnings pie is shrinking, raising the risk that consumer spending slackens next year.

Gross domestic income, or the money earned by the people, businesses and government agencies whose purchases go into calculating growth, rose at an average 2.8 percent annual rate from April through September after climbing 4.3 percent in the previous six months, Commerce Department data on Nov. 22 showed. Employee compensation last quarter accounted for its smallest share since 1955.

In contrast, the portion accruing to corporate profits was the biggest since 1950, showing companies are hoarding cash as concern grows that a European country will default on its debt. Without more pay and a pickup in hiring, households may ring in 2012 by making their own budget cuts.

“Businesses are very cautious so they’re not hiring,” said Michelle Meyer, a senior U.S. economist at Bank of America Corp. in New York. “With slow wage and salary growth, consumer spending will be on a sluggish trajectory.”

The slowdown in U.S. consumer spending may already be on train after another Commerce Department report two days ago showed consumer spending, which accounts for about 70 percent of the world’s largest economy, rose 0.1 percent in October following a 0.7 percent increase in the previous month.

The savings rate dropped to 3.8 percent in the third quarter, the lowest level since the last three months of 2007, which marked the end of the previous economic expansion. The plunge in savings came after consumers experienced two consecutive quarterly declines in after-tax income adjusted for inflation, the first back-to-back drops since the second half of 2009. Households may need to rebuild those nest eggs before they feel comfortable buying more than just basic necessities.

Bloomberg November 2011

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