Friday, December 22, 2006

Current State of the U.S. Economy

Nouriel Roubini have made a fairly good wrap up of this week's economic news (although overall commodity prices have actually been flat during the week).

It seems clear that his earlier prediction of zero Q4 growth will not materialize, for the reason I've explained earlier:namely, that the fall in energy prices have boosted real income and therefore real consumption enough to enable private consumption to expand briskly.

This was confirmed by the personal income and spending report today. Personal consumption was up 4% at an annual rate between July-August and October-November. Even if it is flat in December, it will still be up by 4% for Q4 as a whole too. And as personal consumption is 70% of GDP, that means that it will contribute with a positive 2.8%:points to GDP.

On the other hand, most other components will contribute negatively to GDP. Despite the increase in housing starts in November, residential investments will likely fall again significantly since that increase followed a much more dramatic decline in October and as continued declines in building permits suggest it will fall again in December.

And today's durable goods report suggest business investments is going to be quite weak. While the report's proxy for business investments, shipments of nondefence capital goods shipments excluding aircraft, rose in November, that followed two months of declines. Moreover, December shipments is likely to fall or stagnate as new orders fell again in November.

While the trade deficit fell in October, it is likely to rebound in November judging by the sharp increase in Asian trade surpluses already reported and the fact that oil import volumes was unusually low in October.

Given the fact that inventory build-up for the second quarter in a row was at the highest level since Q2 2004, it seems more likely to fall than to rise.

All told, Q4 growth is likely to be between 1% and 2%, probably closer to 1%. The outlook for 2007 is less certain as it is more in a more distant future, but with the notable anomaly of corporate profits, most indicators suggest a recession. One of these were a report on the shaky state of many mortgages in America, a report which Peter Schiff provided a good analysis of in his latest column.


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