US Economy
Stabilising demand - will the tax rebate work?
It is an interesting case study in how to stabilise demand and output at a time when consumer confidence is declining and the domestic economy has been hit by a sharp negative shock emanating from the housing market. The fiscal rebates will soon be landing in the post boxes of millions of US households ... the key question is how much of a temporary stimulus will this provide for the economy? The Financial Times has a good article on this today.
“The difference depends on how much of the rebate package will be spent and how much will go on imported goods. It is also related to the time-frame over which it is spent, and whether this expenditure will, in turn, trigger knock-on spending ..... In effect the government will nationalise part of US household debt – socialising some of the costs of the economic downturn. In doing so it may reduce the risk of a sudden pull-back in spending by overstretched consumers, even if it does not actually boost spending by much. Analysts estimate anywhere from 20 per cent to 50 per cent of the rebates will be spent over a period of four to six months.”
The impact will depend on the marginal propensity to save and spend the extra income and also the marginal propensity to import goods and services. With a weaker dollar raising the prices imported products, perhaps the propensity to import might be a little lower at this key stage of the economic cycle? The tax rebate is also targeted at Americans on incomes below the top of the pay ladder - whose marginal propensity to spend might be expected to be higher than the super-rich.
According to ABC news:
“More than 130 million U.S. households are eligible for the checks. Individuals could get up to $600, couples up to $1,200 with an additional $300 per child. In total about $120 billion will be doled out over the next two months.”
The rest of the FT article is here
US economy awaits stimulation from Bush’s tax rebate (Guardian)
Currencies hit the Headlines
Two currency movements are in the news today. Firstly the pound has fallen to an eleven year low against the Euro with one Euro now worth eighty pence. The second currency hitting the headlines is the Chinese renminbi which has appreciated beyond Rmb7 to the US dollar for the first time since 1994.
Contestable Markets - Online Music
When was the last time you went into a store or ordered a CD online? The BBC web site reports that iTunes has overtaken Walmart as the biggest retailer of music in the United States. Over 50 million people have used iTunes since its inception but the market for downloadable music is becoming more and more contestable as the major players line up for a share of the supernormal profits that are available. MySpace has entered into a joint venture with Universal, Sony BMG and Warner and will now compete with rivals such as Last FM (a free streaming service) eMusic and Napster. According to the new data (which covers the month of January) 48 percent of US teenagers didn’t buy a single CD in 2007, compared to 38 percent in 2006. Paid music downloads in the USA accounted for almost 30 percent of all music sold in January.
Music sales in the USA (for Jan 2008)
iTunes Store - 19 percent
Wal-Mart - 15 percent
Best Buy - 13 percent
Amazon - 6 percent
How important do you think ‘first mover advantage’ is in this market? As a dedicated iTunes user I haven’t even looked at competitor services for many months now.
Bernanke almost admits that the US economy will enter recession in 2008
Ben Bernanke is getting closer and closer to using the dreaded R word.
read more...»Depression watch: Food stamps a sign of recession?
The Indy carries a vivid front page lead story today about the sharp jump in the number of people in the States claiming food aid in the form of food stamps. The article is headed “The Great Depression” - clearly the headline writers at the Indy dont understand the difference between a recession and a slump.
Our whopping trade deficit!
International trade statistics always come with a health warning atatched to them - the data on the value of exports and imports is frequently subject to future revisions. That said, the ONS released figures today showing that the UK economy ran a current account deficit for the year 2007 of £57.8 billion (-4.2 per cent of GDP), compared with a deficit of £50.7 billion in 2006 (-3.9 per cent of GDP). The rise in the annual deficit was mainly due to a higher deficit on trade in goods and a lower surplus on investment income. A deficit of £46.6 billion was recorded with the EU in the 2007,
compared with a deficit of £39.0 billion in 2006. The deficit on trade in goods was £87.6 billion in 2007, a rise of £10.1 billion compared with 2006. The surplus for trade in services was £38.5 billion in 2007, a rise of £7.4 billion compared with 2006. You can download the data here
I have produced a chart summary of some of the key stats which might be useful when revising the current account with students.
PowerPoint
UK_BoP_2007.ppt
Well it helps the stereotypes…
I normally dislike these “heads up” blog entries because most of our audience are already prolific readers of other news content, but the latest edition of The Economist has published a great piece on the similarities and differences between the British and American public. And it can’t have been an accident that the poll (YouGov & Polimetrix) just happened to coincide with Monsieur Sarkozy’s state visit on Wednesday.
read more...»US Recession Watch: Hold onto your Hats!
The latest Standard & Poor’s/Case-Schiller house price index shows the biggest year-on-year decline in real estate prices for 21 years. Hold onto your hats - US Treasury Secretary Henry Paulson has come out with some very bearish statements on where the US housing market will head before the worst is over.
read more...»A revolution at the Fed?
The current edition of Business Week has a special on Ben Bernanke’s leadership of the US Fed Reserve. As he drives real official policy interest rates into negative territory, this set of articles is good background reading for students in the UK who want to understand a little more some of the differences in approach between the Fed Reserve and our own Bank of England. How big a risk is the Fed taking that its enormous efforts to inject liquidity into the US financial markets and bolster confidence with aggressive rate cuts, will create further problems down the line?
Sachs pins blame on Greenspan
The easy money policies of the early years of this decade are one of the root causes of the credit crunch according to an article by Jeffrey Sachs in today’s Guardian. “Much blame for the current economic turmoil can be placed squarely at the door of Alan Greenspan and the Fed...Monetary expansion generally makes it easier to borrow, and lowers the costs of doing so, throughout the economy. It also tends to weaken the currency and increase inflation. All of this began to happen in the US.”
The rest of the article is here
