US, UK economies on rebound

The United States continues to dominate the global economic scene and this week, all eyes remained focused as the US Federal Reserve met on Tuesday to review the US economy. Investors aren’t expecting the US Fed to make any rate changes, in fact, the bond supporters are hoping for no rate changes until 2005. However, the Fed should make comments on when future rate changes may happen and offer some general views on the health of the US economy.  We have been watching with some interest the US job creation situation. According to a report released last week, initial US jobless claims rose by 442,000 over a seven-day period, which represented the highest level for two months.

As we have said in past articles, many of the United States economic figures are satisfactory and fully support that the United States is in an economic recovery, albeit slow, but the jobs figures has remained weak and many economists have been concerned that companies have not begun hiring again. For the month of August, the government’s monthly report showed a jump in jobs lost when economists had expected job creation. However, on Tuesday, we finally got some encouraging news on the job creation front. A survey conducted by staffing company, Manpower,showed that a larger percentage of companies plan to hire workers in the fourth quarter than those planning to eliminate jobs. The survey is a signal of at least an easing in what many have called a jobless economic recovery. Of course the proof will be in the pudding, but it makes sense that if companies continue to grow in strength, the jobs will follow. More positive economic news came this Tuesday as the US Labour Department reported inflation was better than expected for August.

The Consumer Prices Index (the CPI is a broad measure of prices paid by consumers) rose by a mere 0.3 percent, up only one tenth of a percent from July’s figure of 0.2%. The figure is better than the expected CPI rise of 0.4 percent forecast by a Reuters poll and shows that inflation remains in check. If you strip out the more volatile food and energy prices, the key measure of consumer inflation is even weaker with the core CPI rising 0.1 percent as compared to the expected gain of 0.2 percent. On a year-over-year basis, core CPI is up just 1.3 percent, the lowest such rate of increase since the 1.2 percent gain of 1966. Thus, we are pretty healthy on the inflation front. With some positive job figures starting to show, the only significant economic concern remaining is the risk of disinflation (not be to confused with deflation).

In other US economic news, the equity markets were affected by the release of US retail sales data last Friday. Sales in August increased 0.6% to USD 319.2 billion, less than half as much as economists expected. Purchases of building materials fell for the first time since February and receipts at auto dealers rose by one fifth of their July gain. The US Federal Reserve also announced that US consumer debt rose by USD 6.0 billion in July, to USD 1.8 trillion. The increase was largely attributed to the financing of new car purchases. We note that US Treasuries fell after President Bush asked Congress to back his US$ 87 billion spending package for Iraq and Afghanistan, raising speculation that the Government will increase spending and add to the increasing US budget deficit.

Across the pond, UK manufacturing production in July increased at the fastest pace since November, adding to evidence that the economy is in a recovery phase. Factory output grew by 0.5%, following a 0.2% gain in June. The UK’s trade deficit narrowed to ?3.3 billion in July from ?4.5 billion in June as exports to the US recovered with the change in currency exchange rates. And, UK government bonds moved higher after the release of the University of Michigan report, which showed that US consumer confidence unexpectedly declined in September 3. French industrial production declined by 0.3% in July as a drop in demand for energy and components outweighed rising output of cars and consumer goods. Meanwhile, industrial production in Germany rose at its fastest pace in three years in July. The Swedish Electorate went to the polls on Sunday 14 September to vote to join the Euro. The vote was conducted under the shadow of the death of Swedish Foreign Minister Anna Lindh, who was murdered while shopping in Stockholm on Wednesday. The proposal that Sweden should become the 13th member of the European Monetary Union was defeated by 56.1% to 41.8% (1.9% undecided, 81% turnout).

darcy@investments-intl.com