Okay Tom,
You asked for some Steve Roach commentary and here is his commentary today fresh off the press this morning:
Stephen Roach (New York)
For a third year in a row, the US economy is defying the consensus prognosis of an imminent slowdown. On the basis of a surprisingly vigorous retail sales report for February -- with last month's gains of +0.5% being overshadowed by a staggering upward revision of sales growth in January to +1.0% (from +0.1%) -- we have raised our estimate of 1Q98 real GDP growth to 3.5% (from 2.5%). Inasmuch as we have left our growth prognosis for the balance of the year unchanged, this upward revision in the current quarter has the effect of raising our year-over-year 1998 GDP growth forecast to 3.4% (from 3.1%), well above consensus and Fed estimates that still appear to be in the 2.25% to 2.5% range.
As has been the case for each of the past two years, the swing factor in the growth overshoot of 1998 is the American consumer. Reflecting the unmistakable vigor of recent trends in retail sales, we now believe that real personal consumption is expanding at around a 5% annual rate in 1Q98, a particularly impressive acceleration in the aftermath of the 4.3% average annual surge in the second half of 1997. Nor is this spending burst a fluke. Powered by the seemingly unstoppable combination of brisk real income growth (in excess of 4% y-o-y in the first two months of 1998), the mother of all wealth effects (with the stock market now plowing ahead for a fourth year in a row), and a renewed sense of economic security (supported by 28-year highs in consumer confidence and 24-year lows in the unemployment rate), the consumer just keeps on delivering. In a domestically-dominated US economy -- with personal consumption accounting for fully 68% of GDP -- that's all the American growth machine really needs.
Yet with the widely feared foreign-trade impacts of the Asian crisis still thought to be lurking around the corner, hope springs eternal that the slowdown is on its way. I remain dubious. While the US economy has certainly become more open in recent years, the fact remains that the foreign trade sector still accounts for just 12% of GDP. Conversely, the interest-rate- sensitive sectors of consumer durables, residential construction, and business capital spending collectively account for 25% of GDP. In a low and declining interest rate climate -- augmented by ongoing and vigorous support from income generation and wealth creation -- I am hard-pressed to believe that the balance between external and domestic support is about to tip in favor of a significant and sustained slowdown in the pace of aggregate economic activity.
Interestingly enough, a literal translation of the incoming data flow would have prompted us to raise our 1Q98 growth estimate well above 3.5%. But we erred on the side of caution by increasing our estimates of import growth and lowering our estimates of inventory building. These latter adjustments, which have the effect of partially offsetting the strength in domestic demand, are characteristic of an ongoing re-balancing in the economy -- keeping production (and inventories) in line with sales and recognizing that an increasing portion of domestic demand is now being sourced by low-cost Asian imports. In light of such re-balancing, however, we believe that very little of the unexpected strength in the current quarter may be borrowing from gains that might have otherwise occurred in 2Q98. Largely for that reason, we have left unchanged our 3% GDP growth forecast over the final three quarters of this year.
Obviously, the bond market could care less about another growth overshoot -- at least, for the moment. But it remains my view that this late-cycle vigor in a fully-employed US economy will have increasingly ominous implications for costs, inflation, and profit margins. Labor cost pressures are now starting to break out on the upside. The current-account deficit was just reported to have surged to 2.1% of GDP in 1997. Can the rest of the story really be that far-fetched? |
