Prospects of the American economy

Caroline Baum, an analyst "Bloomberg News"

As the holidays ahead of us waiting, and trade gradually melts away, now is the time to look forward. For the U.S., there are still two prevailing and diametrically opposed views.
The American economy is in a beautiful form, or is about to reach peak and go down. Household balance sheets are also either in good shape, or so strained that require a serious reduction in consumer demand.

The U.S. Dollar has made a very welcome and should be reduced or are on the verge of collapse, which will send increasing yield Treasury bonds and the global economy into a tailspin.

So, what happens?

For the inexperienced observer, the economy, growing at 4% with unemployment at 5.4% and inflation (core CPI), to 2%, is quite good. And even if our observer knows that the economy experienced a series of shocks, starting with the rupture of one of the biggest in the history of the stock market bubble and the collapse of business - investment and subsequent terrorist attacks, corporate scandals records, two wars, the price of oil for $ 55 and various concerns related to the presidential election, it will be even more impressed.

Return the double deficit

However, not all so simple! How about growing deficits (fiscal and current account) and reduce savings rates? The savings rate fell to 0.2% in October, that far from the historic minimum. The government had a record budget deficit of $ 413 billion in fiscal year 2004, which ended Sept. 30. And current account deficit, which is the broadest measure of trade, including goods, services and investment income, rasshirevshiysya to a record $ 164.7 billion in the third quarter. If you evaluate it as a percentage of gross domestic product, the gap fell to 5.6% in the last quarter, slightly away from the record second quarter to 5.7%.

Anyone who wants to find a precedent for such a fulminating mixture, do not need to delve too far into history. Last time, the double deficit was the reason that the "regulation includes the dramatic fall of the dollar (1985-1987gg.), The collapse of the stock exchange (1987) and, ultimately, the decline of American economy (1990g.)," the economists write "Barclays Capital Group "in its review of the global economy in 2005.

This is not the main scenario - at least not in 2005. Chief U.S. economist Henry Villmor said the forecast for sustained economic growth at around 4% and "balanced" monetary policy contraction.

Many risk

"There are many risks, which could lead to" adverse financial developments in 2005. And problems later, "said Villmor. The "bad", he means "Reduced sale of Treasury bonds, the emergence of problems on the stock market and housing, leading to a decline in general welfare."

Bond, suffering from large deficits, a weaker dollar and the five increases in official rates, refused to fall. The yield on ten-year Treasury bonds is about 50 basis points lower than it was when the Federal Reserve start to raise the target rate on a daily credit of 1% at the end of June. Exchanges of shares are also higher.

"If inflation begins to threaten the tolerance values of the Federal Reserve comfort zone - from 2% to 3% for the base consumer price index, the policy-makers will have to leave the" balanced "approach to the normalization of rates and, in fact, put a cross on economic growth," said Villmor .
This can result in cheaper sale stoic on the bond market. The dollar may fall as well as foreign investors will seek compensation for the erosion of real returns. Domestic investors can ignore the low yield in the face of fiscal policy initiatives that could expand the budget deficit in the short term.

Wealth savings

The growing housing market may finally release the steam, due to higher interest rates, which the (or promoted, depending on how you look at it), reducing the savings rate.
Net household reached a peak in the first quarter of 2000., Fell and did not exceed the previous peak until the fourth quarter of 2003. Since the third quarter of 2004., Households have shown increasing its net worth at 3 trillion. $ To peak bubble and a 7 trillion. Minimum of $ 2002.

"Yes, the savings rate of income reduced," said an economist from the "Citigroup Inc." Bob DiKlemente. "It will run its course. The savings rate will rise, but it will be gradual and over a long period of time, as interest rates and other incentives to change."

Profit as the basis

DiKlemente do not agree with the idea that economic growth has been artificially supported by highly supportive monetary and fiscal policy, and that after the removal of incentives, the growth will slump. Instead, he sees a "stream of mergers and acquisitions and rising short-term business - loans will be the early sign that the business ceases ostorozhnichat.

Recent data from small businesses - the November index of the National Federation of Independent Business - has shown that optimism is consistent with the 30-year peak set in 1983. Small business hiring plans reflect the strengths of staff and record levels of capital investment.

"Leading figures associated with the strategies of growth rose sharply," said DiKlemente. "This is yet another sign that the risks are reduced." The optimistic outlook DiKlemente long supported increasing the rate of return of non-financial corporations.

"No significant decline did not begin with improving profit margins," he said. "Rate of return affects the way in which business perceives the future." It sounds as if the optimists and the pessimists are talking about the same economy. The only thing with which they agree - is that a lot of bad things can happen in the next year.

If these things do not happen, the pessimists only moved its forecast for 2006.

Forex Magazine
based on www.bloomberg.com