Postcards from Old Europe – A perfect storm?
The movie “The Perfect Storm” tells the story of a commercial fishing boat, the Andrea Gail, and its crew as it tries to battle through an awesome storm off the coast of Nova Scotia in 1991. The storm was massive because it was actually lethal combination of three weather systems
In October 1991, the atmosphere seemed to go crazy. Three separate weather elements crashed together to form a storm of mammoth proportion?a blockbuster nor’easter?off the New England coast. As Halloween neared, the storm played tricks that veteran meteorologists had never seen a typical nor’easter perform, such as backing up into the Eastern Seaboard to unleash its titanic waves on bewildered beach towns.
To some observers the US economy is starting to look a lot like the poor Andrea Gail in its battle against a perfect storm of rising oil prices, fading stimulus and overstretched consumers.
While the price of oil is the factor that is being reported on the most, we shouldn’t forget that the other two factors may turn out to be more important. Monetary and fiscal stimulus is fading – although it isn’t dead yet. I’m pretty sure that quite a few companies will use the third quarter to pull forward some types of investment to profit from the accelerated depreciation benefits. This should cause new orders to expand – which is exactly what we’re seeing in the manufacturing surveys right now. So a rise in new orders is nothing to get worked up about – just as a move upwards in Q3 GDP shouldn’t cause anybody to become euphoric.
The big question is what will happen when this last vestige of stimulus will cease. If companies pull investment forward then that means that – everything else being equal – there will be less investment next year. That is of course unless demand starts picking up.
The problem with demand is that consumers are reaching the end of their tether. Consumers have been supplementing their stagnating income by financial alchemy such as refinancing their mortgages or by taking on ever more debt. According to a research note out from Goldman Sachs, refinancing put around 550 billion in the consumer’s pockets in 2003. This year will see this amount drop by around 50 – 100 billion according to the same note.
This means that consumers will have less money to spend than last year and will have to spend more of it on energy. This is of course where oil comes in. Even though the black stuff isn’t at record highs in real terms it still is very much more expensive than it was a year ago. The fact that the economy – and consumers – spend less on energy products as a proportion of their income than they did twenty years ago is also only weak consolation. All it means is that the club that is hitting them about the head is just slightly smaller than it was in the past.
Higher energy prices, fading stimulus and lackluster consumer spending could just be the perfect storm that the US economy will have to ride out over the next two years. We should all hope that the crew on deck is up to the task.
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