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Monthly Economic Outlook

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Has The U.S. Come Down With German Disease?

Wed, Aug 6 2008, 16:37 GMT
by Wachovia Research Team

Wachovia

U.S. Overview

Has The U.S. Come Down With German Disease?

Much of the benefit from the economic stimulus checks was siphoned away by higher energy prices during the early summer months. As a result, most of the benefit from the rebate checks showed up in the May consumer spending figures. Spending weakened in June, particularly for big-ticket discretionary items. Motor vehicle sales declined even further in July, hitting their lowest level in 15 years. The net result should be an outright decline in consumer spending during the third quarter, marking the first drop in 18 years. We expect another drop in the fourth quarter.

Energy prices finally broke in late July and the national average for regular gasoline could be close to $3.50 a gallon by Labor Day. Reduced energy prices will not produce an immediate rebound in consumer outlays but should moderate the recent drop. Motor vehicle sales will remain weak through year-end and the Fed will remain on hold.

Overall GDP growth should slow during the second half of 2008 but remain in positive territory. Weak consumer spending is leading to a dramatic slowing in imports, while production cuts at major auto producers and other manufacturers have led to a sharp slowdown in inventories. Inventories liquidation subtracted 1.8 percentage points off second quarter GDP growth. That pace will not be maintained in the second half of 2008, which will provide downside protection to the overall economy

International Overview

High-Yielding Currencies Strengthened Recently

Although a broad measure of the dollar’s value has been rather stable over the past few months, there are some interesting developments occurring beneath the surface. Namely, the U.S. dollar has weakened against some emerging market currencies but the greenback has strengthened a bit vis-à-vis most major currencies.

Central banks in many developing countries have hiked rates recently in response to rising rates of CPI inflation. Not only are interest rates in these countries above comparable rates in most major economies, but they have gotten higher. Currency appreciation in these economies likely reflects flows of speculative money in search of higher returns. The greenback will probably depreciate further versus these high-yielding currencies, at least in the near term.

In contrast, interest rates in many major economies are not especially high nor are they expected to rise further. Although the ECB hiked rates by 25 basis points in July, recent signs of sharply slowing growth in the Euro-zone have led investors to scale back expectations of further tightening. The U.K. economy may be slipping into recession, which should open the door to easing by the Bank of England. That said, the greenback could grind higher versus many major currencies, a significant dollar rally probably awaits Fed tightening, which likely will not occur for some time.

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Published on  Wed, Aug 6 2008, 16:44 GMT