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| The effect of lower interest rates may be limited to slow down the rate of fall in income. With the same level of unemployment rate and with the same level of capital, any rise in income would be matched by a rise in output without any inflation burden. |
| One of the few things that's currently helping to booster the US economy is the growth in exports, that’s the reason for which certain economists are in favor of a weak dollar against the Euro and the Yen. When we consider the increase in US exports, we could insinuate that growth in output matches growth in income, but when we consider income generated by speculation in the commodities sector, there could be no related match increase in output and this is where the current inflationary problem of the US economy seems to be. A solution to this inflationary problem could be a rise in interest rates by the European Central Bank which could attract deposits in European Banks and reduce the flow of speculative funds in the commodity market. For sure the demand for Euro will be higher, the dollar will be weakened but this could be good for US exports and further matched income and job creation for the US economy. In June The United States recorded a loss of 62,000 non farm payroll jobs; this is the sixth straight monthly loss of job, this year, according to the Labor Department; the longest consecutive monthly cut in payroll since the technology bubble in 2001-2002. The Employment Service Sector lost 59,000 jobs, the Manufacturing sector: 33,000, Construction: 43,000, Financial Services: 10,000. However, the Government, the Food Service Industry, the Health Care System and Mining Operations created some 68,000 jobs in non farm payroll jobs. |
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| Separately, Overall US construction spending fell 0.4 percent in May on continued deterioration in the residential sector which fell 1.6 percent in May, down 27.3 percent from a year earlier which a Commerce Department official said was the 25th decline in the last 26 months, but private sector spending on a range of nonresidential structures such as factories, lodging, offices and power plants rose 0.2 percent to a record $405.3 billion. Public construction spending also rose 0.4 percent to a record $301.1 billion. The Institute for Supply Management (ISM) reported its index of national factory activity rose in June to 50.2 from 49.6 in May and the non-manufacturing index at 48.2 in June, versus 51.7 in May; reading of the ISM Indexes below 50 represents contraction in the sector and reading above 50 means potential expansion of the sector. The June ISM Manufacturing Index which is a gauge of factory activity would indicate a slight expansion. But, despite a modest rise of 0.4 percent in new orders at US factories (Excluding aircraft and other transportation items), some economists, like Stuart G. Hoffman, chief economist at PNC Financial Service Group think that the June ISM Manufacturing Index rather reflects a buildup of inventories and higher prices for raw materials, and not an improvement in orders for factory goods. The ISM Non-Manufacturing Index represents the service sector which accounts for about 80 percent of U.S. economic activity and includes businesses services such as banks, airlines, hotels and restaurants. Consumer spending rose significantly for the Second Quarter of 2008. The Personal Consumption Expenditures which measures trends in consumption spending released on June 27, 2008, rose 0.4% (inflation adjusted) after a climb of 0.8% in May, according to data released by the Commerce Department. Consumer spending might be busted by the Government Stimulus Package; the US Treasury has already dispensed more than $78 billion and the stimulus checks might produce the expected effect in terms of retail sales so that the economy could be stimulated. Economists expect the rebates will continue to help retail sales through the summer, generating slight economic growth with an impact on the job market. |
| Increases in Personal Consumption Expenditures reflects economic growth, but when combined with an ISM Manufacturing Index above 50 meaning inventories build-up and higher prices of raw materials, the projection could be |
| a slowing growth with rising inflation. Inflation pressures soared based on price increases in food and energy. Inflation has not hit only the United States; increases in many commodity prices have busted inflation rates around the world. In developed economies, such as the United States, we see the effect in energy prices, whereas in developing countries, for which food takes up more of household budgets, rising food costs have been a more important issue. The Inflation that the world is actually facing, represents a monetary phenomenon caused by a rise in money income followed by a rise in prices and not followed by an increase in the production of food and energy supply. High oil prices, further home price declines and capital markets turmoil will prolong the American economy's slowdown. The Dow Jones declined 7% in the second quarter, 14% Year-To-Date (YTD) and about 20% (19.64%) from its record pick of 14,164.53; the Nasdaq down 13.1% YTD and the S&P 500 down 12.5% YTD and 17.9% from its record of 1,565.15. On average, Financials, Consumers and Industrials stocks declined respectively by 18.1%, 8% and 8.3% for the Second Quarter while Energy, Utilities, Materials and Technology stocks rose by 18.8%, 7.2%, 4.3% and 2.6%. US Treasury Secretary Henry Paulson has referred to a “trio of headwinds” of rising oil prices, the housing slump, and turmoil financial markets to explain the current economic situation in the USA, he added: "There is no easy solution that will immediately relieve current financial market stress or protect against future problems and market challenges which will inevitably occur," . The Fed last week halted an aggressive interest rate cutting campaign, holding rates at 2 percent and warning that inflation risks had risen amid soaring energy and food prices. |
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| In condition of business pessimism, the rapidity with which lower interest rates will stimulate either investment or consumption seems to be less than in conditions of active trade and business optimism. |
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| By Christian Louis on July 5th, 2008 |
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