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Bernanke Downbeat on Economy MoneyNews
(Headlines - scroll down for full stories)
America's deficit in the broadest measure of international trade surged to an all-time high of $804.9 billion last year as the country went deeper into debt to foreigners. The Commerce Department said that the deficit in the current account was up 20.4% from the previous record of $668.1 billion set in 2004. In the fourth quarter, the current-account deficit widened $224.9 billion, surprising economists and sending the dollar down. For the quarter, the current account measured 7% of GDP, up from 5.8% in the third quarter. For all of 2005, the percentage of GDP was slightly lower, at 6.5% - up from 5.7% in 2004 and also a record. The current account is the best measure of trade because it tracks not only goods and services but also investment flows between countries. A bigger current account deficit means that the U.S. needs to convert more dollars to other currencies to pay for imports and that the U.S. needs to rely on foreign investors to invest in stocks, bonds and other assets in the U.S. in order to offset the deficit. The AP reports: "Economists worry that the trade deficit has grown so large that foreigners may balk at holding so much of their investments in U.S. stocks, bonds and other assets. If they began dumping their U.S. assets, that could send the value of U.S. stocks and bonds plunging, pushing up American interest rates and weakening the value of the dollar. If the disruptions were severe enough, it could push the country into a recession."
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The dollar did slide yesterday against all major currencies, including the euro, yen and the Canadian dollar. Also pushing the dollar down yesterday was a rumor that the Fed will stop raising interest rates after one or two more quarter-point increases. A rumor circulated on Wall Street that a report by hedge fund consultant Medley Global Advisers said that most Federal Reserve members want the central bank to stop raising interests rates after one or two more quarter-point hikes. Bloomberg News had this analysis from Michael Malpede, senior currency analyst at Man Global Research: "The obvious impact was from the current account but the kicker came in a rumor from a consulting company that the Fed would stop at 4.75%. The marketplace has shifted focus again." Lower interest rates, as the world's central bankers are raising rates, could divert foreign investment from the U.S. - sending the current account soaring higher and the dollar lower. Editor's Note:
2. Bernanke Downbeat on Economy Federal Reserve chief Ben Bernanke is growing increasingly worried about the burgeoning U.S. trade deficit, saying in a letter to a key U.S. senator that Americans are lagging behind European and Asian consumers in personal savings rates. That widening gap could portend trouble on the U.S. trade front. "In the absence of a shift in market perceptions of the relative attractiveness of U.S. and foreign assets, government policies would likely have only limited effects on the trade balance," Bernanke said in a March 9 letter to New Jersey Democratic Sen. Robert Menendez. The letter was in response to a question the senator submitted in connection with a Feb. 16 Senate Banking Committee hearing on the Fed's semiannual report on monetary policy. Bernanke points out that overseas investors are showing up in force on U.S. shores and that the American economy is increasingly dependent on foreign investment. "This excess saving has been attracted to the United States by our favorable investment climate, strong productivity growth and deep financial markets," he said. He pointed out that the shortfall in the U.S. current account, a broad measure of trade and investment flows, widened to a record $804.9 billion last year, equivalent to 6.4% of U.S. gross domestic product. In an analysis of Bernanke's letter, some economic observers say that the American economy could be hit by a sharp drop in the dollar and a big spike in U.S. interest rates should the foreign investors who have financed the U.S. trade gap lose their appetite for U.S. debt. That said, Bernanke adds that overall U.S. external debt was still "within international and historical norms" relative to U.S. income. "Given the strength and flexibility of our economy, there is every reason to believe that, if changes in the foreign outlook or in the tone of financial markets were to cause a reduction in capital inflows and the trade deficit, economic activity and employment would stay strong," he said. Editor's Note:
3. U.S. Treasury Tells Japan: Don't Interfere with Yen According to an overnight Bloomberg report, U.S. Treasury Undersecretary for International Affairs Tim Adams "cautioned Japan against taking steps to prevent its currency from strengthening during a trip to Asia two weeks ago." Adams' intent is to let the dollar fall against the yen, making Japanese imports more expensive and helping domestic goods. Japan sold record amounts of yen from Jan. 2003 to March 2004 to try to weaken the yen against the dollar. Struggling U.S. automakers contend that Japan continues to keep the yen artificially low against the dollar so that its car exports remain competitive with the U.S., according to Bloomberg. However, recent weakness in the yen is generally attributed to rising interest rates in the U.S. making the dollar more attractive, rather than Bank of Japan manipulation. Though the U.S. claims that it doesn't have a "soft-dollar policy," it has been doing lots of saber-rattling in order to get other countries to stop pushing up the greenback's value.
The United States' main target in this effort is China. The U.S. Treasury is expected to label China a "currency manipulator" in its semi-annual foreign exchange report due in April. China recently de-pegged the yuan from the U.S. dollar, but it remains fairly even with the U.S. currency. The U.S. wants China to revalue the yuan even more than the 2.1% revaluation in July. Editor's Note:
4. N.Y. Manufacturing Activity Grows A leading indicator of nationwide manufacturing, the Empire State Manufacturing Survey, showed marked improvement in March. General business conditions, according to the survey, rose 10 points to 31.2, surprising economists. The numbers were strong across the board - with new orders up 2 points, unfulfilled orders up 11 points, production up 6 points, shipments gaining 6 points and inventories reaching their highest level since September 2001. The employment index also shot up with the average workweek clocking in at 25.3 - a nearly 20-point jump - and the number of employees popped to 21.7 from 6. This improved employment outlook echoes yesterday's Manpower survey. The acceleration in New York manufacturing activity signals improvement for the rest of the nation as well. One area of caution: pricing. The survey shows that manufacturers are having a hard time passing on increased pricing to consumers. According to Economy.com: "Prices paid fell from 53.2 to 40.2 with 41% of respondents reporting a rise in prices relative to 55% in February. Concurrently, prices received dropped 8.7 points to 12.8 this month." That means that inflation may be in check, but manufacturers could be feeling the pressure on their bottom lines.
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