Economic Week in Review: Short week, some better news

 

September 10, 2010

                             

As students returned to school, there was at least some encouraging news that prospects for the economy and workers might be brightening. Economic reports during the holiday-shortened week included good news about the improved U.S. trade deficit in July. For the week ended September 10, the S&P 500 Index rose 0.5% to 1,110 (for a year-to-date total return-including price change plus dividends-of about 0.9%). The yield of the 10-year U.S. Treasury note climbed 9 basis points to 2.81% (for a year-to-date drop of 104 basis points).

 

Fed survey confirms slower growth

 

The Federal Reserve's regular survey of economic conditions across the United States confirmed a variety of other recent economic reports pointing to slower growth. The Beige Book, based on reports from the 12 Federal Reserve Districts, noted "continued growth in national economic activity" for the reporting period of mid-July through the end of August, but also acknowledged that the pace of growth had slowed.

Relative bright spots included tourism, manufacturing, and consumer spending-which accounts for more than two-thirds of the U.S. economy but remains focused on essential goods. Not surprisingly, home sales and construction activity appeared to slow in the wake of the expiration of the homebuyer tax credit. The pace of growth is uneven across the country: Most of the slowdown was reported in the southern and eastern regions (where labor markets are weaker), while growth in the western regions seemed to be continuing.

 

U.S. trade balance improves

 

After widening more than expected in June, the U.S. trade deficit narrowed more than expected in July-a welcome surprise. July's reported deficit was $42.8 billion, down from June's exceptionally high $49.8 billion (revised). The improvement came from both higher exports and lower imports, the opposite of June's trends. Exports grew almost 2%, led by capital goods such as civilian airplanes. Imports shrank about 2%, primarily because of lower auto imports and somewhat lower crude oil prices.

 

 

As Vanguard economist Roger Aliaga-Díaz noted, "An improving trade balance could help brighten the outlook for the U.S. economy. Two of the  main trade advantages of the United States are high-tech capital goods and heavy machinery-both sectors that tend to rebound strongly during a global recovery. Strong growth in emerging markets can become a significant force for the U.S. recovery."

 

Consumer credit declines again

 

Total consumer debt decreased by $3.6 billion in July, representing an annual rate of decline of 1.8%. The sixth consecutive monthly drop reported by the Federal Reserve suggests consumers are being cautious in managing their finances, especially in the face of continued high unemployment. Nonrevolving credit-including auto loans-increased modestly; the average interest rate on new car loans fell below 4%.

 

 

"The consumer credit data suggest that lower interest rates will provide little or no additional stimulus to the economy if consumers are not borrowing significantly," observed Mr. Aliaga-Díaz. "At this point, consumer spending depends more on labor income than on interest rates, and that is why the prospects of the labor market are so critical for the U.S. outlook."

 

The economic week ahead

 

The slate of economic reports scheduled for release next week includes retail sales and business inventories on Tuesday, industrial production on Wednesday, producer prices on Thursday, and consumer prices on Friday.

 

--

Steven C. Deller

Professor and Community Development Economist Department of Agricultural and Applied Economics

515 Taylor Hall --- 427 Lorch Street

University of Wisconsin-Madison/Extension Madison, WI 53706

608-263-6251

"I started out with nothing and I have most of it left."

Seasick Steve

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