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Which Way The US Economy

Omkar Goswami


For more reasons than one, the US Federal Reserve Board chairman Ben Bernanke doesn’t have an easy job. Although Bernanke is a highly rated monetary economist and hasn’t made a wrong move as yet, stepping into Alan Greenspan’s God-like shoes isn’t easy. The world awaits in bated breath for every word that he utters — and one incorrectly nuanced sentence can send global markets into a tizzy. From my perspective, however, Bernanke’s most difficult job is to pour through the mass of economic data that various US agencies routinely produce every month and then make coherent sense of the direction of the economy.


The fact as they stand are somewhat confusing. Consider GDP growth, for instance. According to the final estimates released on 28 September 2006, real GDP for April-June 2006 increased at an annual rate of 2.6 per cent — the lowest second quarter growth in the last four years. Does it mean that the great global engine of growth is finally slowing down?


Not if you look at some other indicators. Manufacturing productivity, measured as output per man hour increased by 3 per cent in the second quarter of 2006. The non-farm business sector has shown a productivity increased by 1.6 per cent over the same period. On the productivity front, therefore, all still seems well. The US still has consistently higher productivity growth trends than any other OECD country.


It is often said that the rate of growth of private housing (or ‘housing starts’ as it is called in the US) is a key lead indicator of which way the economy is heading. Here, too, the picture is hardly dismal. September 2006 saw an addition of 1.77 million new privately owned housing units in the US. This was 5.9 per cent higher than August 2006, although 17.9 per cent lower than a year earlier. Even so, if one were to look at the seasonally adjusted monthly housing starts data, it seems to have gotten out of the trough. After falling month-on-month from January 2006, there is the beginning of an up-tick. Though the business confidence index of US home-builders rose after eight months’ of falling, it is still very difficult to ascertain whether this jump in housing was a September flash in the pan or the start of a slow upswing. And making the right call matters a great deal in getting a fix on overall US GDP growth for 2006 and the way it might be moving.


US retail sales data also seem to be quite reassuring — up by 4.8 per cent in volume terms in August 2006 compared to a year earlier. This was higher than any major OECD country barring Sweden and Canada. Simultaneously, consumer prices were up by 2.1 per cent in September 2006 — this after a 4.3 per cent fall in energy prices — indicating a healthy growth in nominal demand. Seasonally adjusted consumer credit, too, was up by 2.5 per cent in September 2006 compared to a year earlier which, while lower than the growth for June and July of this year, is hardly something that can signal an imminent slowdown.


Finally, the unemployment data remains as positive as ever. Non-farm unemployment rate held steady at 4.6 per cent in August 2006, which was significantly better than what it was a year earlier. In fact, the unemployment rate is the lowest for a long time; and continuous legal as well as illegal immigration makes the labour market the most flexible among OECD nations.  


In this murky scenario, let me venture an early call. I think that the US economy slowed down a wee bit, but it is hardly the beginning of a down cycle. By the end of 2006, I am pretty certain that we will be looking at a GDP growth in the range of 3.4-3.5 per cent, which will be a great performance for an economy of its size. Runaway growth and inflationary prospects have probably been dampened. But there is no need to worry too much about a US slowdown and its global repercussions. Not yet, anyway. And Bernanke is probably resting kind of easy.


Published: Business World, November 2006


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