« August 06, 2006 - August 12, 2006 | Main | August 20, 2006 - August 26, 2006 »
Like Bob Dylan, corporate lobbyists don't need a weatherman to know which way the wind blows. Jeffrey Birnbaum reports in the Washington Post:
Washington lobbying firms, trade associations and corporate offices are moving to hire more well-connected Democrats in response to rising prospects that the opposition party will wrest control of at least one chamber of Congress from Republicans in the November elections.In what lobbyists are calling a harbinger of possible upheaval on Capitol Hill, many who make a living influencing government have gone from mostly shunning Democrats to aggressively recruiting them as lobbyists over the past six months or so.
In June, one of Washington's largest lobbying law firms, DLA Piper Rudnick Gray Cary LLP, transferred the chairmanship of its government affairs practice from a Republican, Thomas F. O'Neil III, to a prominent Democrat, James J. Blanchard, a former governor and congressman from Michigan.
"Being a Democrat didn't hurt me, that's for sure," Blanchard said. "This is going to be a big Democratic year."
At Patton Boggs LLP, another lobbying powerhouse, the calculation is similar. "Democrats' stock has clearly risen in the interviewing process this year as the chances for a Democratic takeover [of the House] have increased," said John F. Jonas, the head of Patton Boggs's health practice. "Serious hiring" of Democrats, he added, has become "a high priority here at Patton Boggs."
"Earlier this year, the propensity was to look mostly at Republicans" as candidates for lobbying jobs, said W. Michael House, director of the legislative group at the law firm Hogan & Hartson. "Now, we're looking at both Republicans and Democrats closely."
Posted by dan at 09:48 AM
If a central bank embarks upon a policy of extended easy money, it tends to encourage speculation, over-investment in real estate, an overheated economy, and inflation. And once those forces take hold, simply raising interest rates a few times won't choke off speculation and inflation. It's a lesson that Iceland is learning as we speak, and one the U.S. may soon learn as well. The "Lex" column of the Financial Times reports:
Central banks choose their words carefully, so when one calls the outlook "unacceptable" and its own policy rate "clearly inadequate", things must be precarious. That was Iceland's monetary authority last month on the crisis following the krona's meltdown. Yesterday, after an extraordinary meeting, it raised rates by a further half point to 13.5 per cent in an effort to quell inflation, which is running at close to double digits.The overheating economy partly reflects lax mortgage-lending but also a programme to build two aluminium smelters worth $4.5bn - a figure that equates to about a quarter of gross domestic product. Fiscal policy is likely to remain loose, given next year's election, but the central bank is now pulling no punches with monetary policy. It projects that the economy, which was growing at a furious 10 per cent a year ago, will shrink in 2008.
Yet Iceland's second vulnerability, a foreign balance sheet that dwarfs its GDP, lingers. Overseas expansion by banks and companies has pushed foreign assets, about half of which are equities, to three times GDP. Foreign liabilities, meanwhile, are 4 times GDP, mainly debt. This creates a structural drag on the current account deficit, which reached a stonking26 per cent of GDP in the first quarter. Net interest payments overseas, less net dividends and retained profits received, explained8 percentage points of the gap. Even if a slowdown eliminated the trade gap, the current account deficit would still be uncomfortably big.
Posted by dan at 09:40 AM
In June, I urged Boeing not to pull the plug on Connexcion, the in-flight internet service. Alas, the company didn't listen. Today, it pulled the plug on Connexion.
Posted by dan at 09:33 AM
Kimberley Strassel, writing in the Wall Street Journal op-ed page about the Rhode Island Republican Senate primary, involving moderate Lincoln Chaffee, and Steve Laffey, a populist who is backed by the Club for Growth, demonstrates her tenuous grasp on reality. She writes:
Northeast "moderates" such as Mr. Chafee might comprise a dwindling bloc in the GOP, but in recent years they've been acting like they own the party. The Rhode Islander set the standard, using his crucial vote to help stymie an extension of the Bush tax cuts, death-tax repeal and budget reform -- not to mention protest a partial-birth abortion ban and Supreme Court Justice Sam Alito. When this crew isn't blocking, it's pushing left, as evidenced by the recent House capitulation on a higher minimum wage.
In fact, the reality is exactly the opposite. The Republican moderates like Chaffee, and like Chris Shays in Connecticut, have essentially gone along with the Bush-DeLay agenda of the last several years. Did they oppose the Iraq war? Did they vote against the huge tax cuts in the first term? Did they vote for the budgets, which contained huge spending increases? Did they vote for the absurd and hugely expensive Medicare prescription drug bill? Um, yes, yes, yes, and yes. That's part of the reason they're in trouble. Have they been able to influence their party's policy on issues like stem cell research, climate change, gay rights. Um, no. And that's part of the reason they're in trouble, too. The northeastern moderate Republicans are increasingly seen by their constituents as impotent enablers, unable to use their status as members of a majority party to enact legislation or to influence the thrust of social policy.
Posted by dan at 09:26 AM
Back in May, I wrote a piece in Slate questioning the efficacy of programs under which countries pay their citizens to have children. Today, an article by Mark Fritz in the Wall Street Journal provides more evidence.
A growing number of nations, seeking to replace aging work forces and retain their national identities, are paying people to become parents. But the cash incentives to spawn new citizens may already be too late.Low fertility rates, combined with population booms in poorer nations, are prompting wealthy nations to open their doors to a flood of immigrants, according to an annual report from the Population Reference Bureau, a 75-year-old nonprofit foundation that collects global demographic data. Much of the pressure to relax immigration restrictions is coming from private businesses, which fear labor shortages.
In the past year or so, dozens of industrialized nations have introduced or beefed up economic incentives -- ranging from cash bonuses to tax breaks to extended maternity leaves -- to get people to have children. Just since March, 16 countries, ranging from Bulgaria to Taiwan, have increased incentives. Germany is expected to raise its fertility incentives soon. Japan has been weighing the idea for 10 years. . . .
The German Bundestag currently is considering reforms designed to make it economically easier for women to bear children. Under the proposed measures, backed by Chancellor Angela Merkel, the government would pay women 67% of their salaries, with a ceiling of €18,000, or about $23,000, for a 12-month parental leave. Men are eligible for a two-month stipend, for a total of 14 months per couple.
Results of such incentives have been mixed. In 2004, Australia began offering bonuses to people who had babies, increasing the bounty to about $3,000 this year. The government has credited that bonus with pushing the average number of births per female to 1.82 from 1.76.
Japan, on the other hand, has been extending maternity leaves and other incentives only incrementally, and its fertility rate has continued to decline, hitting a post-World War II low of 1.3 births per female. . . .
France's fertility rate has risen steadily through increasingly generous tax exemptions for parents with children. Its 1.9 fertility rate far outpaces that of other European Union countries.
Ah, yes, you can always count on those profit-maximizing French!
Posted by dan at 09:18 AM
JetBlue has a clever new marketing gimmick. Angel Gonzalez reports in the Wall Street Journal.
Discount airline company JetBlue Airways is hoping to grab the attention of travelers in oil-crazy Houston with an innovative marketing ploy: flying passengers from New York to Houston for the cost of a barrel of oil.From Aug. 15 to 21, one-way tickets between New York, where JetBlue is based, and Houston will be based on the previous day's closing price of oil on the New York Mercantile Exchange, rounded down to the nearest dollar. The promotion is called "Blue Barrel Fares," and is valid for travel between Sept. 7 and Nov. 15.
The campaign coincides with the launch of the airline's New York-to-Houston route -- and marks a humorous reflection on both Houston's reputation as an oil town and the high fuel prices that are the bane of air carriers world-wide.
"We really wanted to tie into Houston being the energy capital of the world and the price of oil being a thorn in everybody's side," said Todd Burke, JetBlue's vice president for corporate communications. "We want everybody to smile when they think about the price of oil."
The promotion is a way to "turn the price of oil into a good thing," said JetBlue Chief Executive David Neeleman.
Posted by dan at 09:14 AM
Anne Marie Chaker reports in the Wall Street Journal reports on a teacher shortage in the U.S. Gee, could the incredibly low wages have something to do with it? Is it really surprising that offering a $28,000 salary for a job that requires a college education and language skills wouldn't attract many applicants? The $28,352 salary cited in the first paragraph comes down to $545 a week, which is 4 percent below the national average wage, for a job that requires an education level that is far above the national average.
School starts next week in Martinsville, Ill. But until recently, superintendent Jill Rogers didn't have a high-school Spanish teacher. She received just two applications for the $28,352-a-year job, and as the deadline loomed, she finally hired a native Spanish speaker from Argentina without the proper teaching credentials. The new hire will start to teach even before finishing an accelerated certification program at a local university."We're desperate," says Ms. Rogers. "Our only other choice is to not offer the class, and we need to offer foreign language to the students."
It is a problem that increasingly bedevils school districts around the country. Nationally, the demand for teachers continues to rise in a number of fields, such as physics, math, chemistry and bilingual education. At the same time, a flood of experienced, baby-boomer teachers who entered the profession in the 1960s and 1970s are retiring, and relatively few new teachers are sticking with the profession. One analysis of Education Department data by Richard Ingersoll, an education professor at the University of Pennsylvania, showed that 46% of new teachers leave the profession after only five years.
To help fill vacant teaching slots, a number of states are taking action, passing legislation with incentives to attract, train and retain more teachers. So far this year, 18 states, including Illinois, Connecticut, Virginia and Kansas, have passed measures encouraging teaching, according to the Education Commission of the States, which tracks education policy for state governments. The initiatives ranged from luring teachers out of retirement to offering scholarships to programs that forgive education loans. Tricia Coulter, director of the commission's Teaching Quality and Leadership Institute, says legislative efforts gained momentum in 2000, with 21 to 42 state measures each year targeting teacher recruitment and retention. . . .
Data from the American Association for Employment in Education show that the number of teaching categories in "some" or "considerable" shortage is 30. While that is down from the high of 41 categories that were considered to be in shortage in 2001, it is up notably from 10 years ago, when 22 categories were in shortage.
Subjects such as physics, chemistry and bilingual education have moved up to "considerable" shortage from "some" shortage last year. A range of special-education teachers remain on the "considerable shortage" list.
Some areas where there is actually a surplus include health, dance, gym and social studies
Posted by dan at 09:08 AM
Gregory Zuckerman reports in the Wall Street Journal on the corporate debt binge.
Corporations are borrowing money at the fastest clip in several years amid a wave of leveraged buyouts and acquisitions, rising capital expenditures and pressure from shareholders for larger dividends and share buybacks.The debt is expected to keep rising in the next year -- especially if the Federal Reserve holds off on more interest-rate increases -- as companies raise cash to repurchase more shares and to make higher quarterly and special-dividend payouts. For now, economists say the balance sheets of most companies are strong enough to handle the added borrowing.
In fact, the moves could help the stock market deal with an expected slowdown in profit gains later this year as the economy contracts. That is because both higher dividends, and buybacks that raise earnings per share by reducing the number of outstanding shares, could help offset any decline in profit growth.
Nonfinancial companies saw their debt rise 6.3% in the 12 months that ended in the first quarter to $5.5 trillion. That is the fastest yearly growth for debt in five years. In 2005, debt increased at an average 12-month pace of 5.1%, while in 2004 debt growth was 2.7%, according to John Lonski, an economist at Moody's Investors Service. Debt is expected to have increased about 7% in the second quarter.
The rosy debt scenario is predicated on an economy that doesn't weaken significantly, and on interest rates not climbing much higher, both of which would make the increased debts more of a burden. It all comes at a time when individuals and the U.S. government are dealing with their own heavy borrowing, making it more important for U.S. companies to successfully handle their added debt.
"I don't think we are at the point of excess yet, we've had five years of discipline for corporate balance sheets," says Richard Berner, an economist at Morgan Stanley. The increasing embrace of debt "is bad news for bondholders but good news for shareholders."
Given recent history, in which the economic and corporate establishment, have generally failed to forecast economic slowdowns and the path of inflation, this doesn't inspire a great deal of confidence. And of course, in the end, unmanageable debt can become very bad news for stockholders.
Posted by dan at 09:02 AM
Austan Goolsbee has a good column in today's New York Times about state-directed efforts to attract industry clusters.
THEY say that everything is bigger in Texas. Last week, the state tried to bring that attitude to academics with the announcement of a $2.5 billion initiative for science teaching and research in the University of Texas system. The hope, it seems, is to use the university system to jump-start economic development and continue to move Texas away from its traditional dependence on energy, raw materials and real estate.A primary focus is building the research capacity at campuses away from the flagship in Austin, with much of the money going for science centers at campuses in San Antonio, El Paso and Arlington in an attempt to turn those places into the next Silicon Valley.
We have heard that argument before. And Texas, which has a bona fide technology center in Austin, is certainly not alone in wanting to create new Silicon Valleys: states all over the country are trying to turn their universities into engines of regional economic development.
If Stanford can hatch world-famous companies around Palo Alto, politicians assume, their colleges can, too. But with so many trying to spin universities away from their traditional academic focus into engines of economic development, it is worth considering whether investing in local universities can achieve that goal.
This strategy is based on the view that research done by professors can form the basis for local start-up companies and that the graduates of the university can supply the entrepreneurs and employees.
But advocates should remember an old maxim of economic development: Beware of investing in things that can move. As it turns out, graduates and research ideas both tend to move around a lot. . .
A study by the economists John Bound, Jeffrey Groen and Gabor Kezdi of the University of Michigan and Sarah Turner of the University of Virginia, “Trade in University Training: Cross-State Variation in the Production and Stock of College-Educated Labor,” found little evidence of people staying in places because they went to college there.
The more likely smart people are to leave, the more money their state is spending on helping another area’s economy develop. Marc Andreessen, for example, invented the Web browser while at the University of Illinois, but then founded Netscape in the actual Silicon Valley rather than starting a new one in Urbana.
Texas may subsidize science teaching at the University of Texas, El Paso, but the chance that its graduates will stay and transform the local area into Silicon Rio Grande is remote.
Posted by dan at 08:54 AM
How do you spell love? M-O-N-E-Y. Karen Kozlowski, the second wife of disgraced, convicted ex-Tyco CEO Dennis Kozlowski, files for divorce. Maybe she's finally realized she won't get any more $2 million birthday parties.
Posted by dan at 03:44 PM
The developing is doing plenty of deals on its own. Shai Oster and Eric Bellman reports in the Wall Street Journal.
China and India have bought part of an oil company in South America, the second time the world's two biggest emerging economies have put aside their longstanding energy rivalry to work together.India's state-owned Oil & Natural Gas Corp. teamed up with Chinese government-owned Sinopec Group to buy half of Omimex de Colombia, Indian Oil Minister Murli Deora said yesterday. Omimex is owned by U.S.-based Omimex Resources Inc. . . .
Officials at Sinopec, China's second-biggest oil company by output, declined to comment.
China and India have been seeking new supplies to satisfy their rapidly growing demand for oil. In the past they have tried to outbid each other for oil supplies in places like Africa and Central Asia. Their bidding wars over international energy resources have sometimes pushed prices higher.
Posted by dan at 03:26 PM
Fred Bergsten, director of the Institute for International Economics, writes in the Financial Times that we should forget about huge global trade deals and focus on smaller ones.
The indefinite suspension of the Doha round of world trade talks creates big risks for the world economy. A new explosion of discriminatory bilateral and regional agreements is likely to substitute for global liberalisation. This will inevitably erode the multilateral rules-based system of the World Trade Organisation. The backlash against globalisation will generate more protectionism in the vacuum left as momentum towards wide-ranging reduction of barriers ceases, especially as the world economy slows and global trade imbalances continue to rise. Financial markets will become more unstable as international economic co-operation breaks down further.Hence there is an urgent need for a "plan B" to get world trade policy back on track. That strategy should have three key objectives: to spur the revival of Doha; to offer an ambitious alternative to restart the process of liberalisation on the widest possible basis if that primary goal fails; and to counter the proliferation of preferential deals among small groups of countries.
The best candidate for this is for leaders of the Asia-Pacific Economic Co-operation forum to launch a free trade area of the Asia-Pacific region (FTAAP) when they meet in Hanoi in November. The 21 Apec members account for more than half the world economy and almost half of world trade. The group includes most of the world's most dynamic economies. . . .
Achievement of an FTAAP would have huge positive effects on global output. Realisation of anything close to free trade by half the world would deliver much larger benefits than even the most ambitious outcome of Doha, which at best seeks modest reductions in market impediments. The distributional impact would be quite different from a multilateral deal: the gains would accrue to Apec members while many outsiders would suffer from trade diversion. But the net outcome would be far superior to a world without substantial new liberalisation or one with a panoply of additional bilateral preferential accords. Indeed, one of the key advantages of the FTAAP is that it would sweep together the smaller deals already in place and head off those that will otherwise ensue. . .
But would the launch of an FTAAP revive the prospects for Doha or, as some charge, further undermine them? The last global trade negotiation, the Uruguay round, missed its initial deadline in 1990 and was suspended for three years because the EU was then also unwilling to reform its farm policies. In November 1993, the first Apec summit shocked the world with its commitment to achieve free trade. Less than a month later, the EU suddenly embraced enough agricultural liberalisation not only to revive Uruguay but also to bring it to a successful conclusion. When asked to explain the abrupt change in their position, top European negotiators replied that the decisive element was the Apec decision because it "showed us you had an alternative that we did not".
The leverage of an FTAAP in 2006-07 would be much greater than that of the Apec declaration in 1993. Operational results would be foreshadowed and thus generate much stronger inducements for countries outside Apec to restore the multilateral track. A broader group of naysayers would be jolted into supporting the global approach, including India and Brazil as well as the EU because they would be so adversely affected if "plan B" were to supplant Doha. The prospect of eliminating most of Asia's trade barriers would also provide a powerful incentive for the US Congress to extend President George W. Bush's negotiating authority, which will expire next summer and doom any chance of reviving Doha unless there is a strong tangible reason to keep it alive. Credible launch of an FTAAP could thus save the global trading system, whether it restored Doha or itself became a second-best but still powerful engine of new liberalisation for the world economy.
Posted by dan at 03:14 PM
Excellent article in the New York Times by Simon Romero on the rise in U.S.-Venezuela trade. Yes, capitalism can be very ironic.
"Yet even as the talk from Caracas and Washington grows more hostile and the countries seem to be growing ever farther apart, trade between Venezuela and the United States is surging.Venezuela’s oil exports, of course, account for the bulk of that trade, as the country remains the fourth largest oil supplier to the United States. Pulled largely by those rising oil revenues, trade climbed 36 percent in 2005, to $40.4 billion, the fastest growth in cargo value among America’s top 20 trading partners, according to WorldCity, a Miami company that closely tracks American trade.
But American companies are also benefiting, as Venezuela’s thirst for American products like cars, construction machinery and computers has steadily grown, rising to $6.4 billion last year, from $4.8 billion a year earlier.
The new growth comes even as Mr. Chávez has done his best to try to redirect his nation’s trade toward what he considers more likeminded nations. He has formed a new socialist trade agreement with Cuba and Bolivia. A few Chinese cars can now be glimpsed in showrooms here. Iranian tractors are rolling off a new assembly line. And a Russian company plans to open a Kalashnikov rifle factory soon. . . . .
But while the leaders in Washington and Caracas may regard each other with distaste, there is little getting around the fact that the appetite for trade in both nations belies those differences. Especially when it comes to oil, the economies remain mutually dependent. . . .
Still, the trade numbers illustrate a widening gulf between Mr. Chávez’s increasingly anti-American speeches, aimed at revving his political base, and the needs of Venezuela’s otherwise freewheeling economy.
For instance, non-oil exports to the United States climbed 116 percent in the first three months of the year, according to the National Statistics Institute. Venezuela also maintains close ties to Wall Street banks, with Morgan Stanley and Credit Suisse advising the governments of Venezuela and Argentina on their coming sale of $2 billion of bonds. . . .
Regulatory filings show that Venezuela’s economy, which grew 9.6 percent in the first half of the year, is lifting profits for many American companies.
Most delicately, oil services companies like Halliburton, an emblem of the Venezuelan government’s distaste with American foreign policy, are at the forefront of the deepening interdependence. . . .
With 10 offices and 1,000 employees in Venezuela, Halliburton recently won a contract to assist Petrozuata, a venture between Venezuela’s national oil company and ConocoPhillips, in extracting oil from fields in eastern Venezuela.
Posted by dan at 09:45 AM
My latest in Slate, and what to do when your CEO buys a gigantic yacht.
Posted by dan at 09:43 AM
Clearly, the economy downshifted in the second quarter. The Bureau of Transportation Statistics reports that the number of people flying fell in the early part of the quarter.
In the most recent month, May, U.S. airlines carried 64.0 million scheduled domestic and international passengers, 0.3 percent fewer than in May 2005, the second time in three months that U.S. airlines carried fewer system passengers than the previous year. The number of domestic passengers declined 0.4 percent in May from a year earlier while international passengers increased 5.8 percent.
Posted by dan at 09:16 AM
Dillard's, the middle-American, mid-range department store, reported its earnings yesterday.
Net sales for the 13 weeks ended July 29, 2006 were $1.688 billion compared to sales for the 13 weeks ended July 30, 2005 of $1.692 billion. Net sales for the period were unchanged on a percentage basis in both total and comparable stores.
Posted by dan at 08:43 AM
More evidence that executive compensation is something like a zero-sum game between CEOs, shareholders, and labor. Ellen Schultz and Theo Francis report in the Wall Street Journal on new research surrounding about cash-balance pensions.
For employers, switching to a cash-balance pension plan reduces future payouts and boosts earnings. That, in turn, can result in big gains in executive incentive pay, which is tied to earnings.Researchers at Cornell University, the University of Colorado at Boulder and the University of California at Irvine examined hundreds of companies that converted their pensions to a cash-balance formula, and they found that the average incentive compensation for the chief executive officers jumped to about four times salary in the year of the pension cut, from about three times salary the year before. Companies that didn't change their pensions saw little change, says Julia D'Souza, a Cornell associate professor of accounting and lead author of the study, which is currently under review by an accounting journal.
For example, filings show that when Cooper Tire & Rubber Co. converted its pension to a cash-balance plan in 2002, the CEO's incentive pay rose to $1.5 million -- the highest level in a decade -- from $702,000 the year before. After a similar move by Clorox Co. in 1996, the incentive compensation for G. Craig Sullivan, its chief executive, jumped to $5.6 million from $961,000 the year before.
A spokesman for Cooper Tire called any correlation between its CEO's pay and its pension changes "completely coincidental." Clorox didn't respond to requests for comment.
Posted by dan at 08:36 AM
Only in the pages of the Wall Street Journal "culture" pages. Bernard Goldberg writes about Mike Wallace's "60 Minutes" interview with Iranian President Mahmoud Ahmadinejad:
"In fact, instead of seeming like a modern Hitler (a not unreasonable comparison, given that one wanted to exterminate all the Jews while the other wants to wipe Israel off the map), Mr Ahmadinejad came across as, well, a fairly typical, run-of-the-mill liberal."
Posted by dan at 08:33 AM
Prices of rubber and oil have risen sharply. As a result, so, too, are the price of tires. David Pearson reports in the Wall Street Journal.
French tire maker Michelin SA, beset by surging energy and raw-material costs, said it is raising prices of the tires it sells to car manufacturers by between 6% and 8% in a move to share its pain.Industry observers said it is the first time they can remember that a tire maker has made public its pricing intentions specifically for original-equipment manufacturers. . . .
Thanks to its leading market position, Michelin is now getting tough with auto makers that are themselves embroiled in a fierce price war and are trying to get equipment suppliers to reduce prices.
Michelin's main competitors, Goodyear Tire & Rubber Co. of the U.S. and Japan's Bridgestone Corp., both recently reported sharp profit declines, reflecting high raw-materials costs as prices of rubber and oil have soared this year,
Michelin said last month it expects a 23% increase in raw-material prices in 2006, representing an additional cost of €800 million ($1.02 billion). The company had previously estimated the extra raw-materials cost at €540 million for the year, compared with €450 million in 2005.
In the first half, the average price of natural rubber, one of the main components of tires, was about 70% above that of the year-earlier period. Tire makers are also facing increased costs of steel and of synthetic rubber that is made from oil byproducts affected by higher crude-oil prices.
Posted by dan at 04:09 PM
Stephen Roach of Morgan Stanley, a charter member of the Gloom & Doom Caucus, growls, bearlike, in the Financial Times today.
The world’s main growth engine, the US, is slowing. That is the verdict from the labour market, with job growth in the past four months running 35 per cent below average since early 2004. It is the verdict from the housing market, where an emerging downturn in residential construction activity is knocking at least 1 percentage point off the GDP growth trend of the past three years. . . .America’s slowdown represents an important transition in the sources of economic growth, away from the vigorous wealth creation of asset bubbles – first equities, then housing – and back towards more subdued labour income generation. The delayed impact of higher interest rates is also taking a toll. Even though the Federal Reserve has put its two-year monetary tightening campaign on hold, there is a risk it has already gone too far. The confluence of higher energy prices, rising debt-servicing burdens and negative personal saving rates reinforces the possibility of a pullback in discretionary US consumption and GDP growth. . . .
But who will fill the void as the US consumer pulls back? The simple answer is: maybe no one. Europe, the world’s second largest consumer, is an unlikely candidate. Surprising economic growth on the Continent this year may be borrowing from gains that might have otherwise occurred in 2007. The European economy is about to be hit with a “triple whammy”: a big tightening in fiscal policy , the delayed impact of monetary tightening and the drag of a stronger euro. Growth in the eurozone may exceed 2.5 per cent this year, marking the strongest gain since 2000. Next year, it could slip back below 1.5 per cent.
Do not count on a rejuvenated Japanese economy to fill the gap either. In dollar terms, Japanese personal consumption is only 30 per cent of that in America; that means every 1 percentage point of slower consumption growth in the US would have to be replaced by about 3 percentage points of acceleration from Japan. As a weak second quarter GDP report indicates, such a surge is unlikely, especially as Japan copes with a stronger yen and higher energy prices. While growth in Japanese GDP should exceed 2.5 per cent this year, in 2007 it could slow to less than 2 per cent.
Nor are the two dynamos of developing Asia – China and India – likely to counter the slowing trend in the developed world. China has a seriously overheated economy. With real GDP surging at an 11.3 per cent annual rate in the spring period and industrial output growing at a record 19.5 per cent year on year in June, Beijing has little choice but to introduce tightening initiatives. A failure to do so could see trade protectionism squeezing exports and a deflationary overhang of excess capacity leading to an investment bust. China must shift its economy towards private consumption, a sector that sagged to just 38 per cent of GDP in 2005. (A healthy rate would be at least 50 per cent.) . . .
There is a deeper meaning to the coming slowdown. The global boom of the past four years was never sustainable. It was supported by the excesses of the liquidity cycle, which arose from emergency anti-deflationary actions of the world’s big central banks. The ensuing vigour of global growth was dominated by the US consumer but America’s binge came at the cost of a record drawdown of domestic saving funded by the capital inflows of a record US current account deficit. The boom was balanced precariously on unprecedented global imbalances.
Posted by dan at 04:06 PM
The developed world has been sending cash to places like Brazil and Mexico for commodities like oil, soybeans, and iron ore. Now, the money's coming back.
Paul Prada reports in the New York Times that Brazilian mining company Compahnia Vale do Rio Doce has offered nearly $18 billion for Canadian nickel produer inco.
And the Financial Times reports that Telmex, the big Mexican phone company, has taken a significant cstake in Portugal Telecom.
Posted by dan at 03:56 PM
My latest "Economic View" column in the New York Times. Get it while it's still free!
Posted by dan at 03:46 PM