StratInfo - Strategic Information Analysis Inc. Miami, Florida, U.S.A.
November 15, 2000 U.S. EconomyAs we had predicted, the Fed passed up on a rate increase at the October 3 FOMC meeting. Presidential politics was a clear reason to avoid making any statements. Nevertheless the recent signs of some slowing in the economy could postpone another rate hike until December or January 2001.
The revised second quarter GDP figures help to pin point the slowing trend in the economy. While GDP expanded by 5.8 percent, personal consumption on durable goods fell by 5.0 percent, non-durable goods consumption also showed a moderate slowdown to 3.8 percent. Investment in residential construction slowed noticeably during the past year. Consumers have apparently been pinched by the increases in interest rates. Interestingly consumer sentiment remains euphoric. While the index has slipped modestly since June, it is still at the same level as more than a year ago.
Another interest rate sensitive sector, business fixed investment, continues to expand at a very brisk pace. During the second quarter it was up 11.2 percent. Apparently businesses are not shy about expanding capacity.
One of the risks in the outlook is oil prices. In September, West Texas Intermediate had peaked at $33.88 per barrel. If prices do not come down soon, it will add greater pressures to the inflation pipeline. At the same time, high gasoline prices is likely to cool off demand for large gas guzzling vehicles such as SUVs.
The consumer price index (CPI) fell in August 0.1 percent, due to the fall in oil prices in July. However, in view of the surge in oil prices during August and September, we expect the CPI to post higher than normal inflation rates during September and October. Strong productivity growth has so far been a big relief.
Potential Risks in the Horizon:
Consumer savings and debt have reached worrisome proportions. So far the interest rate increases have failed to cause any panic; but this situation needs to be monitored closely. The personal savings rate fell to a negative 0.4 percent rate in August, It had never fallen below 3 percent during the 1990s, and the normal rate is about 6 percent. The debt service burden continues to rise, reaching 7.64 percent in the first quarter of this year.
Latin American EconomiesThe U.S. trade deficit continues to bulge. In July the trade deficit was $31.89 billion. We continue to expect the current account deficit to reach an unsustainable 4.2 percent of GDP this year. This could be bad news for the US dollar.
Economic and political difficulties deepen in Argentina. The tone of street demonstrations is reaching a crescendo as public dissatisfaction with the economic morass intensifies. The government is negotiating with the IMF and friendly countries, to put together a US$20 billion rescue package.
Brazil posted strong 3.5 percent growth in the first half of the year. The economy is in line to achieve our projected growth of 3.9 percent this year.
In Peru all eyes are on the lookout for former presidential adviser Vladimiro Montesinos. The current political impasse overshadows economic issues and is looming large on next year’s prospects for Peru.
The historical transfer of power in Mexico, set for December, is unsettling the currency markets. We expect moderate volatility in the next few months, until the new Fox administration establishes full control of government.