Despite the American third quarter growth figures, the real story of the current health of the American economy will be found in the statement at the end of next week’s two-day Federal Reserve meeting in Washington.
Specifically people will be looking at the wording in the post-meeting statement, as we saw in September.
"The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."
No matter what the first reading on third quarter growth says, and other data, the still deeply sluggish state of the American economy can be found in that paragraph.
The growth figures do however; give some confidence that the economy is at least growing, not sliding.
US growth was 3.5%, above the forecast 3.2%.
The news turned market sentiment, with Wall Street jumping more than 1%, the US dollar falling, gold, oil and the Aussie dollar surging (The Aussie jumped 2 US cents in a few hours).
However two of the biggest contributors — spending on durable goods (such as cars, or the cash for clunkers Scheme) and residential investment (the $US8,000 home purchase rebate) — received substantial boosts from Washington’s stimulus package.
Excluding motor vehicles, third-quarter GDP advanced at a more modest 1.9% annual pace.
Housing made a positive contribution, the first since 2005, thanks top the impact of the rebate, the support for the mortgage market from Fannie Mae and Freddie Mac, which control 95% of all mortgages issued in America and the Fed’s purchases of mortgage related securities to drive interest rates down.
But that was much better than the 0.7% fall in the second quarter and the 6.4% plunge in the three months to March.
And the US figures at least tell us (and Americans) the economy has move out of the red, unlike the terrible shock the UK received a week ago when the first estimate of third quarter growth was a negative 0.4% (instead of the widely forecast positive 0.2% rise), which meant the country was now in the longest slump since the 1930s.
But no amount of boosterism or optimistic forecasting will change the grim reality that there’s more do, years in fact, before the US economy is right sized and rebalanced.
But unemployment remains high (an update at the end of next week), millions of people have lost their houses and their jobs, the Federal deficit is huge (as is the red ink at many states and towns).
More than 100 banks have gone bust so far this year
Next Tuesday we in Australia should see a further 0.25% rate rise, which would take the interest rate differential with the US to 3.25% and a clear indication of the benefits of having an economy in recovery, with business and consumer confidence remaining at high levels; and starting to be supported by improving conditions for businesses of all shapes and sizes.
The strong Australian dollar will continue making a mess of earnings and sales for a host of companies (but not utilities like AGL, which yesterday forecast a solid 11% rise in earnings for the current year).
Sales and demand are slowly recovering in this country; you can’t say that about the US or Japan where yesterday Industrial production in September rose 1.4% from August, but remains 18.9% lower than it was in September 2008.
In America this week durable goods orders, an important indicator because it measures output of longer lasting goods from planes, to boats and frigs, rose 1% in September, the third rise in four months. But it was down more than 24% from the same month in 2008.
While that rebound in the economy is welcome, the grim truth is that compared with a year ago, US economic activity is still way lower.
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And now, unlike Australia, consumer confidence is falling. The fall, registered in the US Conference Board’s monthly survey, supports similar falls in the other monthly survey from Reuters and the University of Michigan.
After recovering from the very low levels at the start of the year when the end of the world as we know it seemed very real, the rebound has faded and the Index fell to 47.7 in October from an upwardly revised 53.4 in September. Forecasts were for a reading of 53.5.
In Europe, tough news as well, with the first ever year on year fall in bank lending, a sign of just how weak demand is in the group for money.
Even though loans to consumers rose in September, the amount was still down year on year, as was lending to business.
Lending contracted by 0.3%, after growing by 0.1% in August.
It was the first time the figure was negative since the ECB’s records began in January 1992.
Despite the European Central Bank’s unlimited liquidity provisioning of the eurozone’s banking system, there’s no sign of this translating into higher lending.
The ECB said loans to non-financial companies decreased by an annual rate of 0.1% in September, after gaining 0.7% in August.
Loans to eurozone households meanwhile fell at an annual rate of 0.3% after declining 0.2% in August. House lending fell sharply as well.
(Even in Australia bank lending for everything bar housing is very weak because of low levels of demand.)
The slump puts America at odds with most other major economies where consumer confidence is still solid, or consolidating at levels well above the lows hit earlier in the year; even in the UK where the rebound helped fool economists into believing the economy was growing. It contracted in the third quarter.
Even Europe has seen an upturn in confidence levels, though it’s clearly not being translated into greater demand for loans from households or business.
In the US confidence levels, consumer credit and l
