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Sunset Times Ramps Up Us Economy

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... but America is heading for a red hot 2006


ECONOMIC theory is clear about one thing: increase the supply of a good and, other things being equal, its price will fall. So the US government hugely increased the supply of its bonds to finance its deficits, and their price . . . rose. (When bond prices rise, their yields, or interest rates, fall.) When the government was running surpluses of some $200 billion (£115 billion) in 2000, retiring bonds and reducing their supply, the interest rates on 10-year Treasury bonds was above 6%.

Last week, when President Bush sent to Congress a budget projecting a deficit for fiscal 2007 of well over $400 billion, portending a further increase in the issuance of Treasury IOUs, the yield on 10-year bonds was not higher, but lower — about 4.5%...

America has now become the country of choice for overseas investors. They find the combination of safety provided by a stable political system, and a central bank intent on raising interest rates, attractive. So high-saving Chinese and other foreigners, their coffers overflowing with dollars earned from exporting to America, snap up US Treasuries, keeping American interest rates low.

The rapid growth of the American economy, which in the past would have set off inflation alarms, has not caused panic because globalisation makes available to American industry a huge supply of labour and productive capacity. In past years, the 4.7% unemployment rate now prevailing would have signalled a labour market so tight as to generate substantial wage inflation. But a pool of low-cost foreign labour and rising productivity have kept increases in wages and benefits within acceptable bounds. Or at least within bounds investors, ever on the watch for hints of inflation, find comforting...

It is now clear that the Christmas sales season was a success for the nation’s retailers. And, with happy recipients of Santa’s largesse cashing in their gift cards last month, sales of a sample of 60 retail chains started the new year with a jump of almost 5% over last January’s rate, according to Retail Metrics, a market-research firm. There is more to come. Economists at Goldman Sachs captioned their latest report The US Consumer Roars Back.

Shoppers, after all, know one important thing: the jobs market is about as good as it gets. Monthly job growth in November, December and January averaged 229,000, driving the unemployment rate to 4.7%, its lowest level in more than four years. All signs are that hiring will continue at a rapid rate for the balance of the year.

Business investment is also likely to remain strong. The National Association of Business Economists reports that a majority of its members are experiencing increasing demand for their products. A Price Waterhouse Coopers survey found that 76% of large manufacturers are optimistic. As they should be, the sector having racked up growth of 4.8% and 3.8% in 2004 and 2005 respectively. “All in all,” as Business Week’s James Cooper puts it, “it is more a picture of acceleration than moderation, and one likely to cause some discomfort among Fed officials if the data in coming months confirm that the economy remains strong enough to make future inflation a threat.”

Meanwhile, investors seem unworried that such growth will uncork inflation. The Treasury reintroduced its 30-year bond to investors last week after a five-year absence, and it got a good reception, selling high enough to yield only around 4.5%. That suggests fears that a booming economy will ratchet up inflation may be confined to the Fed’s boardroom.

Indeed, bond buyers seem to be signalling that they expect the economy to soften markedly, and perhaps even slip into recession. The economic data are telling the opposite story. All Bernanke has to do is to decide whether he believes the bond market, which is predicting inflation-free, slow growth, if not a recession, or the raft of economic data that seem to foretell a red hot 2006.

Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute

Full article found on above link.



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  • 336 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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