DEPRESSED U.S. ECONOMIC CONDITIONS
United States' manufacturing sector has also showed contraction in the recent past.
By ALI FARHAN CHAUDHRY
Nov 25 - Dec 01, 2002
U.S. economic growth advanced during the third quarter 02, but at a pace slower than the economists' expectations. U.S. gross domestic product growth increased at 3.1 per cent annual rate in the three months from July to September 02, which was lower than expected of 3.6 per cent rise though above the previous quarter's 1.3 per cent rise.
U.S. economic conditions gloomed as the consumer confidence showed that the American consumers are over spent and not willing to buy due to persistent job cuts and corporate crisis.
U.S. economy is basically a consumer based economy and consumer confidence is the main gauge to judge the health of the economy. U.S. consumer confidence data on October 29, 02 fuelled fears that U.S. economic recovery is running out of steam. U.S. Consumer Confidence Index fell for a fifth straight month in October to 79.4, its lowest level since November 1993, the reading initiated capital flight from the U.S. assets. These outflows were witnessed by steep fall in stocks that ultimately knocked the dollar down to multi-week lows against the Euro and the Japanese yen. Here one thing is worth discussing that long prevailing depressing U.S. economic conditions are also alarming for other major economies of the world.
The immediate effect of consumer confidence comes on the retails sales, which comprises of two third of the US economy. U.S. retail sales fell 1.2 per cent in September to $302.5 billion, following a revised 0.6 per cent increase in August.
United States' manufacturing sector has also showed contraction in the recent past. The U.S. Chicago Purchasing Manager's Index (PMI) fell more than expected in October to 45.9, a second straight monthly drop. Another manufacturing index, ISM (Institute of Supply and Management) factory index, witnessed sluggish activity and fell to 48.5 in October from 49.5 in September, against an expected figure of 48.9. A figure below 50 indicates shrinkage in the manufacturing industry.
United States is also worried due to the job market conditions especially after September 11 event. U.S. economy shed 5,000 jobs in October 02, pushing the jobless rate up to 5.7 per cent from 5.6 per cent in the month of September.
On the other hand, persistent widening trade deficit is also hampering the U.S. economic growth. The intensity of the situation can be judged by the recent figures showing the trade deficit of $38.46 billion in August from $35.07 billion in July, which is nearly 10 per cent increase on monthly basis. Exports fell for the first time in six months and demand for foreign consumer goods pushed imports to their highest level since March 2001. The larger trade gap was also translated in gross domestic product growth in the third quarter.
U.S. Labor Department showed inflation tamed in September 02, with consumer prices rising only 0.2 per cent overall and 0.1 per cent in the closely watched core component that strips out food and energy costs. This inflation figure provided justification to the U.S. Federal Reserve to cut rates by an aggressive half point to 1.25 per cent on November 6, 2002. Fed took this monetary step in order to boost the economic growth. But after the recent rate cut by the Fed it is confirmed that the United States is in real trouble as the eleven rate cuts by the Fed in last year failed to initiate desired economic growth. Meanwhile, after the recent rate cut the Fed signaled to stand apart arguing that the risks to the economy are now balanced between weakness and inflation. The U.S. stock markets welcomed the Fed's decision and reacted with a strapping rally, with both the Dow Jones Industrial Average and the Nasdaq Composite both up about one per cent.
On the other hand the Fed's bold decision to cut its rates by 50 basis points disturbed the interest rate differential that ultimately was translated in the foreign exchange market where the dollar lingered down across the board. While, Bank of England left its rates steady at 4.0 per cent, and pound's rate premium over the dollar widened to 275 basis points. Additionally, the Swiss National Bank and European Central Bank also held their rates, which boosted the concerned currencies as the focus concentrated to interest rate differentials.
At the end, geopolitical situation related to Iraq also hampered the U.S. economic growth prospects, as investors are pulling out capital for secure investments. More uncertainty noted after the U.N. Security Council voted unanimously for a tough U.S.-initiated resolution giving Iraq one last chance to disarm or face the consequences. It gave President Saddam Hussein one week to accept its terms. While U.S. President George W. Bush has said he hoped to avoid war. So in the current situation the U.S. needs to restore consumer confidence locally and investors' confidence globally for better economic growth and also to solve geopolitical issues with clear vision.