U.S. Review
More Signs of Recovery but Worries Still Remain
-
Eleven of the twelve Fed regions reported economic conditions stabilized, improved or firmed in July and August. The St. Louis district was the lone descent and even there the rate of decline seems to have moderated.
-
The trade deficit widened more than expected, with imports rising more than any other month since March 1993, which reflects some firming in domestic demand.
-
Weekly first-time unemployment claims declined to 550,000 but may have been distorted by the Labor Day holiday. Hiring is still weak, however, as job openings fell to their lowest level since records began in 2000.
More Encouraging News
The Fed’s Beige Book now clearly shows the typical progression the economy tends to go through as it moves from recession to recovery. Eleven of the Fed’s twelve districts noted economic conditions had stabilized, improved or firmed. Only St. Louis noted a continued decline and even there the rate of decline moderated. The cash-for-clunkers program boosted traffic and sales at auto showrooms in most regions. Many areas also noted that home sales and single-family construction were seeing some improvement. Retail sales outside of autos were reported to be flat and demand for commercial real estate remains weak. Employment conditions also show little sign of improvement, although staffing firms in a number of districts reported an uptick in demand for temporary workers.
The University of Michigan’s Consumer Sentiment survey rose in early September, climbing 4.5 points to 70.2. Both current conditions and expectations increased solidly during the period, showing much more balance and improvement than the Consumer Confidence Index. The University of Michigan’s consumer sentiment index tends to correspond more closely with swings in the stock market, which has shown surprising strength in recent months. By contrast, the Conference Board’s Consumer Confidence Index more closely tracks employment trends, which show virtually no improvement. Consumers are not likely to boost purchases of big-ticket discretionary items until they feel more confident about their employment and income prospects. As a result, the rise in consumer sentiment likely does not point to any major shift in consumer spending.
Important adjustments continue to take place in areas of the economy where excesses clearly need to correct. Consumer credit declined a much larger than expected $21.6 billion in July and declines from previous months are now reported to be much larger than first reported. The large declines likely reflect a number of necessary but unpleasant adjustments. Consumers are clearly cutting back on discretionary purchases and using debit cards and cash more frequently. Credit card issuers are also reducing credit lines and charging off doubtful accounts, which is likely the source of the large downward revisions to the consumer credit outstanding figures. The high level of charge offs means credit underwriting will likely remain tight for some time, which will make it tougher for consumer spending to come roaring back, particularly for big-ticket discretionary items.
Another key adjustment that is taking place is the continuing drawdown in inventories. Wholesale inventories fell 1.4 percent in July, following a 2.1 percent drop the previous month. Inventories of automobiles have seen some of the largest drops, falling 2.0 percent in July and 2.1 percent in June. All major categories declined, however, with machinery inventories falling 1.5 percent and groceries falling 1.1 percent. The latter likely reflects, at least in part, price declines for a number of key grocery items. The drop in machinery is more significant and may reflect some progress at clearing out bloated inventories of construction machinery and heavy trucks.
Global Review
Swiss Economy Appears to be on the Mend
-
Switzerland has been mired in recession for more than a year. However, recently released data suggest that the economy may be turning the corner due, at least in part, to recoveries taking hold in other countries.
-
The Swiss franc rose this week to a 14-month high against the dollar. As long as franc appreciation against the dollar is not accompanied by franc strength vis-à-vis the euro, Swiss authorities likely will refrain from intervening in currency markets.
Swiss Economy Appears to be Turning the Corner
Like most of its neighbors in continental Europe, Switzerland has suffered through a year of recession (top chart). That said, the downturn in Switzerland has not been nearly as bad as in the Euro area. Whereas the Swiss economy has contracted about two percent, real GDP in the Euro-zone has plunged five percent.
Recently released data, however, suggest that things may be on the mend in Switzerland. As shown in the graph on the front page, the manufacturing PMI has risen sharply from its nadir earlier this year. In August, the PMI poked its head above 50, a level that is generally ass0cicated with expansion, for the first time in a year. The leading economic indicator for Switzerland is also consistent with stronger activity in the months ahead.
Why is the year-long recession easing? For starters, the external environment certainly is playing a role. At the time of the global meltdown last year exports were equivalent to nearly 60 percent of Swiss GDP, and Switzerland sends about 50 percent of her exports to the Euro area. Thus, the deep downturn that hit the Euro-zone last year imparted a major shock to the export-dependent Swiss economy. However, the incipient recovery that appears to be taking hold in the Euro-zone is now spilling over the Alps to Switzerland. Although the volume of exports in July was down about 15 percent on a year-ago basis, it appears that real exports are starting to grow on a sequential basis.
In addition, Swiss authorities did not sit by idly while the world was melting down around them. The government implemented a small fiscal stimulus package, recapitalized some important Swiss banks, and raised deposit insurance limits. The Swiss National Bank (SNB) slashed its target for the 3-month LIBOR rate from 2.75 percent last October to only 0.25 percent in March. Swiss LIBOR rates initially were elevated due to bank reluctance to lend to each other. However, as fears about the banking system have subsided, LIBOR rates have drifted lower with the 3-month LIBOR rate settling in around 0.30 percent. The stimulative policy environment may be helping to shore up the domestic economy. (Although retail spending has clearly weakened, retail sales growth turned positive again on a year-ago basis in June.)
Given the importance of international trade to the economy, Swiss authorities are very mindful about the value of the Swiss franc vis-à-vis other currencies. Indeed, the SNB intervened in currency markets earlier this year when the Swiss franc was appreciating. This week, the Swiss franc rose to its highest level against the greenback in more than a year (bottom chart). Does this mean that another round of intervention is imminent?
Due to extensive trade ties with the Euro-zone, the value of the franc versus euro is the most important bilateral exchange rate to Swiss authorities. In that regard, the franc is not nearly as strong versus the euro as it was when the SNB intervened earlier this year. Swiss authorities likely will tolerate appreciation against the greenback as long as it doesn’t go hand-in-hand with franc strength versus the euro. If the SNB intervenes, however, the dollar probably would experience some temporary strength against the Swiss franc.
