Jackson Hole in the Tetons in the American state of Wyoming, is said to be beautiful at this time year. Mountain air, blue skies, the open spaces. Lots of trees. This weekend it is likely to be gloomy as many of the world’s leading central bankers gather for the annual conference run by the US Federal Reserve.
Gloom will be the order of the day because the meeting will be looking at the global outlook, which has, well, got gloomier in the past two weeks with the US slumping towards what could be another round of negative growth, the huge Japanese economy on the edge of a fall into the red, while gripped by deflation; China slowing and apart from Germany, Europe mixed as debt concerns start to resurface after taking a summer break.
The conference will get an early-morning heart starter at 8.30, Washington time, with the release of the second second-quarter growth estimate. It’s unlikely to be good news with a big cut in the figures expected. That will add to the growing sense of helplessness than some are seeing among central bankers and other authorities as they try to steady a recovery that has peaked in many countries and is now fading, too rapidly for the comfort of some.
And yet there will be one attendee with a different story. Ric Battellino is deputy governor of the Reserve Bank of Australia. His story is of growth, inflation, job creation, cautious consumers, low debt. He will be going fresh from making a major speech in Brisbane on election eve, which detailed Australia’s unprecedented 20 years of growth and our current economic outlook.
Get Crikey FREE to your inbox every weekday morning with the Crikey Worm.
It was a conservative speech, but nevertheless confident about Australia’s outlook, so long as we keep a close eye on inflation.
Just that one word will be enough to spark interest among other central bankers now battling to deal with intensifying disinflation and possible deflation in their economies (apart from Japan, which still can’t come to grips with deflation, despite it dominating that economy for much of the past two decades).
Battellino will, of course, be attending as the data flow ahead of the release of our second quarter GDP numbers next Wednesday continues to point towards a solid level of growth in the three months to June.
While the slowing in the contribution from government spending will be a big negative, the contributions from retail sales is already pegged at a stronger-than-expected level, construction figures out yesterday surprised on the upside and the trade account has moved heavily into surplus as our terms of trade soar off the back of high prices for iron ore and coal.
But capital spending remains weaker than expected, although expectations continue to rise, according to Australian Bureau of Statistics figures out today. That will temper hopes for a rise of 1% or more in quarter-on-quarter growth.
Unlike many other countries, especially Japan and the US, Australian unemployment is falling, jobs are being created and tax revenues are rising. Despite the absurdist claims of the Federal Opposition, debt and the deficit are under control and falling, thanks to higher tax revenues.
Certainly the news from the US in the past couple of weeks will mean that Friday’s double hit of the second estimate for second quarter GDP growth and a major speech by Fed chairman Ben Bernanke to open the Jackson Hole conference, means that Australia’s story will be noticed, envied, but ignored because the fears are now of a looming slump.
The first estimate of US second quarter growth was 2.4%, US economists now have their new estimates about 1.2%-1.5% (these are annual figures), or about 0.3%-0.4% quarter on quarter. There’s another release of weekly unemployment benefit figures tonight. A repeat of last week’s shock when the weekly figure climbed to a nine-month high of about 500,000, would see those estimates come down again from analysts made even nervier by terrible housing sales figures this week.
The US new housing figures were rotten, down to a record low of an annual rate of just 276,000, with June restated to just 315,000. The July rate is about double Australia’s current rate of new home building, and yet the US economy is about 14 times larger than Australia’s. But the current rate in the US, along with the rotten slump in sales of existing (pre-loved) homes could intuitively be the bottom the market is searching for.
It’s hard to see more months like the past three for the US housing sector, which is now firmly entrenched in a deep depression and won’t escape for some time. In fact, discounting for the impact of the home tax credit (which finally ended in April), it’s hard to escape the conclusion that the US new and existing home sectors have been in a depression now for at least three, maybe four years.
If new home starts, permits and sales, plus existing home sales continue at about current levels for the next few months, home prices will start falling again, but we won’t see the 20%-30% drops we saw in some regions from 2006 to 2009 (around Nevada, Florida and California). The falls could be up to 10% and will help establish a bottom for the sector. But don’t expect to see that happen until well into 2011.
US manufacturing is slowing, as are durable goods orders (for products that last longer than three years) which is an important indicator of business investment; inventories are starting to edge higher, retail sales are stuttering, in the week ending August 11, US banks saved another $US35 billion to take their cash pile to $US1.3 trillion, and bought another $US35 billion of US government debt (It’s safer to lend to Uncle Sam than to main street businesses or consumers).
Credit card balances are falling, and yet rates are at nine-year highs; US home mortgage rates are at record lows, but new business is weak and most of the loans are refinancings as existing home owners cut their interest costs to try and make up for loss of income from falling interest payments, dividends, share prices and cuts in salaries and hours in many cases. Or a loss of jobs.
The US labour force is now just over 129 million people, what it was a decade ago. More than 7 million people have lost their jobs in the past three years and in the past 10 years, America’s adult population has grown by 6 million, meaning the employment picture is worse than the 9.5% official rate. In fact, including the million people who dropped out of the US labour market from May through July, the unemployment rate would 10.4%, according to economists.
In the third quarter reports from major US retailers, every comment was about how “challenging” conditions were, how muted sales were, with discounting intensifying, cost cuts being promised to maintain earnings and consumer very reluctant to spend.
The mighty Wal-Mart, which rode through the recession in 2007, 2008 and part of 2009 as US consumers traded down to cheaper and cheaper goods, has seen negative same-store sales in its US shops now for five quarters. Pizza Hut is slashing the price of its products to try and maintain business, Kindle book readers are now just over $US120 each in New York, less than half the list price. There are numerous stories of other companies doing the same thing, cutting prices to try and hold business, let alone increase sales.
All this will be discussed at Jackson Hole, but not by Ric Battellino, he’s got the traditional central banker’s worry central in his mind, inflation. Australia is a very, very lucky country at the moment. Let’s hope the fruit loops and others in Canberra understand that.