FX Briefing - US economy: velocity of fall diminishing
FX Briefing 17
sector plunge seems to be slowing down
Â·US residential construction is creeping sideways â€“ at
Â·IMF warns of
long recession and slow recovery
US economy: velocity of fall
Over the last few weeks, the euro has weakened somewhat
in relation to most major currencies. EUR-USD is currently around 1.31, a good 2 per cent
lower than a fortnight ago. Similarly, EURJPY has fallen to about 130. USD-JPY
has remained virtually unchanged at just under 100.
However, contrary to what one might have expected, given
the experiences of the last few
months, equity markets actually brightened up a bit.
This was because earnings reports, particularly from the banking sector, turned
out to be remarkably positive on the whole. Furthermore, numerous US politicians, from President Barack Obama and his
advisor Lawrence Summers to Fed chairman Ben Bernanke tried to raise
confidence. They all saw the first signs of stabilization in the US.
We should not get our hopes up too high, however. About
all that can be deduced from the
data, is that the velocity of the fall could be
diminishing. Industrial production fell to its lowest
level in 10 years in March; the decline in the first quarter
was 5.4% quarter-on-quarter â€“ much steeper than in Q4. In the last quarter, the
ISM index rose modestly, but its current level of 36.3 (the neutral level is
50) is still signalling an ongoing sharp contraction. The regional surveys of
the Federal Reserve Banks of New York and Philadelphia, which were published this week, went up slightly more in April, but these indicators too are
continuing to show contraction in the manufacturing sector.
After increasing the previous month, the number of
housing starts and building permits dropped in March, almost reaching Januaryâ€™s
record low. With a bit of good will, this could be interpreted as â€śbottoming
outâ€ť. But building activity is still at a catastrophically low level. At about
500,000, the number of housing starts was only a third of the
average for the last 50 years; nominal (!) expenditure is currently at the same level as at the
beginning of 1998. The situation is not likely to change much in the foreseeable future either. The
massive supply overhang both for new and existing homes is making it less attractive to build
new ones. And rising unemployment will probably also play a part in keeping the supply of houses
up and demand down.
In the first quarter as a whole, private consumption seems
to have remained relatively stable; it
is possible that the increase in unemployment was
initially balanced out by the purchasing power effect of lower energy prices.
However, after having risen in the two previous months, retail sales fell again
quite significantly by 1.1% in March. People are putting larger purchases of durable
consumer goods on hold.
The International Monetary Fund published two chapters
of the new World Economic Outlook in advance this week containing an interesting analysis
on how long the global recession could
last and what the upswing could look like. The IMF
economists come to the conclusion that there is little possibility of a
This is because, unlike in earlier recessions, no impetus
can be expected from US domestic demand; in the recession at the beginning of
the 1980s, for example, there was considerable pentup demand for property and
durable consumer goods due to the high interest rate policy. When interest
rates began to fall, people started spending, thus triggering a powerful spurt
of growth. Things are quite different this time: consumers are deeply in debt (the
monetary fund describes the situation as â€śoverleveragedâ€ť), and their first priority
will be to reduce their debts. They will therefore probably hold back on
Another factor which is different from earlier recessions
is the global dimension of the downswing. As a result, there is not much scope
for countries to generate a recovery by means of exports. Therefore, the
International Monetary Fund is expecting the recession to be long and the
recovery to be sluggish.
We share the IMFâ€™s view. The job losses, credit defaults
and insolvencies all pose significant
economic risks in our opinion. The fact that the downswing
has slowed down is currently being hailed as a positive sign, but it could drag
on for several quarters and cause great damage. At present, capacity
utilization is so low that â€śstabilizing tendenciesâ€ť are no longer enough to
sustain companies and jobs.
In this environment, it is hard to make exchange rate
predictions. In the short term, we are expecting the dollar to strengthen,
primarily due to safe haven considerations and hopes of the more aggressive US economic policy succeeding (and vice versa, a
critical assessment of the economic policy measures in the eurozone). In the
longer term, however, we see a danger of the US discovering the dollar exchange rate as an additional
policy instrument. A depreciation of the dollar could be justified from an
economical point of view by the balance of payment situation, but it would
exacerbate the problem, particularly in Europe.
Rieke +49 69 718-4114
Grabbe / Klaus NĂ¤fken
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