What Profile for the US Monetary Policy?

The Fed strategy can be summarized this way

1 – The Fed sees a lower risk to the economy. Growth forecasts have been revised upwards in 2014. In March GDP growth rate was expected in the range [2.9 – 3.4] with a middle range growth rate at 3.15%. The forecast in June is in the range [3 – 3.5] with a middle range growth rate at 3.25%. Nevertheless for 2013 the central rate was revised  slightly downwards to 2.45% as central rate midpoint against 2.55% in March.
The unemployment rate is revised downwards in 2013 to 7.25% in mid-range against 7.4% in the March forecast. For 2014 the expected unemployment rate is 6.65% in June versus 6.85% in March. Continue reading

Remarks on the Fed

There is lots of discussion on the Fed’s new strategy that could be presented by Ben Bernanke during his press conference. The preferred scenario seems to be one where the US central Bank will reduce its asset purchases to USD 60bn instead of 85. It could be done next September. But nothing will be said on the future path of these purchases. It will be data dependent.

On this decision the most important part will be the reasons of this change. We see that macro data in the USA are not so strong Continue reading

Employment in the Euro Area was down in the first quarter – Weak Internal Demand could be the Culprit

Employment retreated again in the Euro Area during the first quarter of this year. It dropped by 1.8% (annual rate) and was down for the seventh quarter in a row. Since the local peak in the 2nd quarter of 2011 it is decreasing at a -0.9% annual pace. It’s quicker than GDP which is down at a -0.8% pace. Continue reading

The Two crisis in the Euro Area

The chart below shows the two shocks that have hurt the Euro Area since 2007.

In red is the period following the Lehman bankruptcy. For the Euro area it was a strong exogenous shock on its economic activity and on its unemployment rate. From October 2008 to April 2010 unemployment rate was up by 2.4% from 7.8% to 10.2%. The impact was long lasting but all the plans that were put in place in 2009 by governments were able at the end to support activity and to stabilize the Euro Area unemployment rate. Continue reading

Do we have to fear deflation in the Euro Area?

May be will we have to answer rapidly to this question as companies’ surveys do not show tensions on prices and because inflation rates trend lower, below the ECB inflation rate target.

A deflation period would have very negative consequences for the Euro Area. We know that when consumer price index is trending downward it implies a weakness on economic activity. One simple reason can explain this issue: it is valuable to wait to spend as in the future prices will be lower. Deflation has also some negative impacts on behavior as maintaining wage purchasing power would imply a lower nominal wage. It is a very disturbing situation that can increase households’ negative momentum by increasing uncertainty. It doesn’t also create incentives to invest for companies as demand cannot be expected to be strong immediately. It is better to wait. In other words, when deflation is not the consequence of a technological shock it produces a very negative situation, a recession or a long period of very low growth. This could lead to high unemployment rates throughout the Euro Area and probably social instability. That’s a point we have to keep in mind. Continue reading

A simple chart to understand the world economic outlook in May 2013

The chart below shows synthetic indices from PMI/Markit and ISM surveys for the manufacturing sector in different large regions of the world.

What is important to catch is the kind of common dynamic with almost no divergence between the lines. All the lines except Japan were close to 55 in 2009/2010 during the recovery. They are all now close to 50 which is the level where activity does not change from one month to the other. There is no recent break on the upside or on the downside. (When I mention simple in the title is just that we can imagine a common dynamic and no divergence)    Continue reading

Positive signals on trade in the Euro Area should lead to a stronger outlook

Euro Area indices from PMI/Markit surveys were higher in May. The manufacturing sector momentum is improving even if the global index for the Euro Area is still below the threshold of 50 that separates improvement and deterioration. But stronger trade between countries as it can be seen in May is a condition for a better outlook. That’s the new and important issue.

Continue reading