Obama has a new economic advisory team in place. Obama-speak on fresh economic initiatives with a new team seems to excite investors. This leads to a return of risk appetite and investors seem to be willing to look at other options than staying hedged with dollar investments. The dollar eases and then come in economic results that do not seem to bode well for the global economy. We all know that the US economy is a consumer driven economy. Consumption expenditure accounts for a major part of America’s GDP. With the US being the largest importer of consumer goods, a contraction in US consumer spending is likely to hit economic growth in other nations as well.
With this being the economic linkage, the latest news that American consumption fell by a solid 1% in October, which was the biggest drop since the last fall in 2001, does not bode well for the global economy. The 1% drop in October followed a 0.3% fall in September. In reality the 1% fall, adjusted for inflation was only 0.5%, but when compared to a similar inflation adjustment fall, the last equivalent drop was in 1990-91 period. What is worse is the timing of the fall. This is festive season with Christmas around the corner. It is the time, when retailers experience maximum sales that helps them shore up their average annual sales. However, this time around, retailers would be happy if they do not experience negative growth during the festive season.
This shrinkage in consumer spending does not seem isolated to the US alone. In the UK as per latest government data, consumer spending fell by 0.2% in the third quarter. Official data also suggests that the German economy contracted by 0.5% in the same period, which is a first time contraction in 16 years.
The damage does not seem limited to the US and Europe alone. China, which has become the largest contributor to global economic growth, is likely to slow down substantially. The key reason for this is that China is virtually a factory for the US and if consumption in US falls, China’s production and its growth rate will take a hit. In response to this expected slowdown, the Chinese government lowered interest rates by over a percent to 5.58% and at the same time announced a $586 billion stimulus plan.
In the meantime, the key trigger for this recession, the US housing slump does not seem to be getting any better either. Purchase of new homes fell 5.3% on the back of falling home prices! The S&P Case-Schiller home price index fell a whopping 16.6% in the third quarter. Average home prices in the US are down nearly to 2004 levels.
In all the economic mayhem that seems to be weakening the global economy, the US government announced a bailout for the collapsing Citi Bank and stated that it may be willing to buy up to $600 billion in mortgage backed assets. These sparks of light seem to have made the Dow see an uptrend and also seem to have brought some respite to an overbought dollar. However, the overall news does not seem to bode well and the respite for the dollar may only be a spark in the dark.