arthur Guest
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Posted: Sun Nov 28, 2004 2:59 pm Post subject: Economic Outlook |
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There have been changes in the U.S. economy recently:
1) Employment growth has picked-up over the past year, in part, because monetary policy remains accomodative.
2) Consumer confidence fell over the past six months, in part, because debt levels and energy prices are both high.
3) GDP has moderated to roughly 3 1/2% real growth in 2004.
4) Inventories are still lean.
5) Corporate investment remains light.
6) The U.S. dollar continues to weaken.
7) Housing market remains strong.
8] Energy prices continue to rise or stay high.
9) CPI (consumer inflation) remains tame.
10) PPI (producer inflation) is rising.
11) Productivity growth is slowing.
12) Import Prices are rising.
Rising oil prices increase production costs. Consequently, with little pricing power and a slowdown in productivity growth (which is normally the result when employment growth increases), profit growth will slow. Also, high oil prices (including other high energy costs, e.g. utilities) will lower consumption for non-oil goods & services. Moreover, the weakening U.S. dollar will increase U.S. export growth and decrease U.S. import growth; and a weaker dollar causes interest rates to rise, which will negatively affect the housing market. However, a weaker dollar will also increase exports. The fear is a precipitous fall in the dollar will "overheat" the U.S. economy creating accelerating inflation, which will force the Fed to hike rates to higher levels.
Therefore, higher interest rates will, domestically, lower consumption growth, increase the savings rate, and slow construction spending. However, the weaker dollar will boost employment growth, raise corporate revenue, and spur corporate investment. Energy prices will be a key factor to determine the cost of production, consumption growth, future interest rates, and profit growth. In the Consumption Function: Y = C + I + G + NX; Consumption may fall, Investment may rise, Government may fall, and Net Exports may rise. Consumption represents two-thirds of growth. So, output growth may fall. In the Production Function: Y = T(L, K, R, E, ..., X), production costs may rise and productivity may fall. So, output growth may fall, unless consumer prices rise enough to offset higher costs and lower productivity. |
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