Given the many different economic stories out previewing the week, it’s hard to know what to think. Gauging sentiment as investors and money managers sort through the stories remains important, especially as many of the stories point the economy is moving in different directions.
The Wall Street Journal piece talked about the decline in the value of the dollar as people begin to reexamine the strength of the U.S. economy:
The dollar is stumbling as investors begin to question the relative strength of the U.S. economic recovery, which had powered a rally in the greenback in the first half of 2013.
The WSJ Dollar Index, a gauge of the dollar’s exchange rate against seven of the world’s most heavily traded currencies, is down 4% in the past month and hit a seven-week low on Friday. Before the selloff, which began after the dollar hit a three-year high in early July, the U.S. currency was up 8.3% for the year.
Driving the reversal: a shift in views on when the Federal Reserve might start reining in some easy-money policies that are a legacy of the financial crisis, many fund managers say.
Many investors had piled into the dollar earlier this year on the belief that robust growth in the U.S. would lead the Fed to scale back its bond-purchase program, which has been pumping $85 billion into the economy each month, in the fall.
Not only would a receding flood of dollars raise the greenback’s value, the positive signal it would send about the U.S. economy would give the dollar additional fuel by attracting money flows from outside the U.S., analysts say.
However, disappointing economic data, mainly weaker-than-expected jobs growth and tepid retail sales, have prompted some currency investors to back away from bullish dollar bets that were based on the Fed reducing—or “tapering”—bond purchases in September, well before other major central banks would be ready to start tightening monetary policy.
It turns out that investors have some grounds for questioning the strength of the U.S. economy. The New York Times wrote a story outlining how corporations are doing better, but workers aren’t benefiting:
AMERICAN companies are more profitable than ever — and more profitable than we thought they were before the government revised the national income accounts last week. Wage earners are making less than we thought, in part because the government now thinks it was overestimating the amount of income not reported by taxpayers.
The major change in the latest comprehensive revision of the national income and product accounts — known as NIPA to statistics aficionados — is to treat research and development spending as an investment, similar to the way the purchase of a new machine tool would be treated by a manufacturer, rather than as an expense. That investment is then written down over a number of years.
The result is to make the size of the economy, the gross domestic product, look bigger, and to appear to be growing faster, in years when new research spending is greater than the amount being written down from previous years. For the same reason, corporate profits also look better in those years.
A lot of money is spent on research and development. Nicole Mayerhauser, the chief of the national income and wealth division of the Bureau of Economic Analysis, which compiles the figures, said that in 2012 the total was $418 billion, about one-third of which was spent by governments. That amounted to about 2.6 percent of G.D.P.
The other major conceptual change deals with pensions. Until now, corporate and government contributions to pension plans were counted as personal income only when the contributions were made. Under the revision, the government estimates how much should have been contributed to meet the promises made to workers, and counts that amount, whether it is higher or lower than the amount actually put into the pension plan. That causes personal income to appear larger in years when pension contributions are lower than they should be.
So, on paper, people look like they’re making more, but that isn’t directly translating into dollars they can spend. Then, there’s the problem of inflation, which Bloomberg says is likely to be the highest in 10 weeks:
Treasury market inflation expectations climbed to the highest level in 10 weeks before reports economists said will show costs rose in July, while holding within the Federal Reserve’s target.
The Fed’s measure of traders’ forecasts for prices in the economy for the period from 2018 to 2023, known as the five-year forward break-even rate, rose to 2.73 percent, the most since May 28. It has advanced from this year’s low of 2.33 percent in June. The average over the past decade is 2.75 percent. Long-term Treasures, those most sensitive to inflation, are the world’s worst-performing bonds over the past year.
“The market’s pricing in an ongoing recovery,” in the economy, said Peter Jolly, the Sydney-based head of market research for National Australia Bank Ltd., the nation’s biggest bank as measured by assets. “Treasuries will underperform. For now, inflation is pretty benign.”
There is some good news. Reuters posted a story saying that new economic data from Europe could signal the end of the recession:
A tentative view that the global economy is emerging from its lull could harden into conventional wisdom by the end of this week if, as expected, data show the euro zone’s lengthy recession has ended.
While Europe is still the world’s biggest trading region, some of its recent major exports – financial market panic, banking scares and political uncertainty – have dragged on the world economy over the last three years.
There are now signs of a nascent recovery, led by Germany and perhaps Britain.
Wednesday’s data are expected to show the euro zone economy grew 0.2 percent in the second quarter, according to a Reuters poll. That would mark an end to the recession that took hold in late 2011.
That won’t change the U.S. position as the main engine of economic growth in the world, at least until next year, with Chinese growth still slowing and India wracked by a currency in free-fall.
But even the smallest sign of a recovery in Europe augurs well for the rest of the year.
I’m choosing purposely to end on this positive note. Here’s hoping the data come out in the same direction.
