World Economy
0

Concerns Rise in America

Concerns Rise in AmericaConcerns Rise in America

Consumer sentiment weakened in June as Americans’ views of the economy darkened, the University of Michigan said.

Its final reading for June fell to 93.5 from 94.7 in May. In a MarketWatch survey, economists had forecast a 94.0 reading. That was also well below its level a year ago, when it touched 96.1.

Consumers were more bearish about expectations for the economy. That gauge fell to 82.4 from 84.9. Views of current conditions perked up, rising to 110.8 from 109.9.

Inflation expectations also rose. Consumers now expect inflation to gain 2.6% over the next five years, the strongest reading since March.

Michigan’s survey drew some attention when respondents’ views on inflation sank to the lowest on record earlier this year.

As central banks have struggled with the legacy of low inflation, expectations that prices will remain low may be just as worrisome. Some economists believed that Americans were finally taking note of low inflation just as the economy was starting to push past the issues that were keeping inflation depressed. Others worried that if inflation did start to gain just as consumers were becoming accustomed to low prices, spending might be curtailed.

But consumers may be more in touch with economic changes than realized, wrote Amherst Pierpont Securities’ Chief Economist Stephen Stanley in a note Friday.

“Chair Janet Yellen and others at the Federal Reserve have highlighted low inflation expectations as an important downside risk, so, if the dust from Brexit settles without too much damage and the US economy returns to normal fairly quickly (as I expect), this could be a noteworthy development,” Stanley noted.

Brexit Effects

The direct effect of a Brexit vote on the United States is limited by the US economy’s small direct economic exposure to the UK. US exports to the UK make up only about 0.7% of US gross domestic product, Barrons reported.

So even if the UK falls into recession as a result of Brexit, which PNC Bank now views as a 40% probability (some say over 50%), the hit to US exporters will be small.

Eurozone growth is also likely to suffer, although the currency union is less likely (20% probability) to fall into recession. This could create another small drag on US growth: exports to the eurozone are about 2% of US GDP.

The more important risks to the US are likely to be indirect. Greater uncertainty about the prospects for global growth and increased financial market volatility could make US businesses more cautious in hiring and investing. Uncertainty and volatility will also push investors to seek the safety of the US dollar, making the currency strengthen in the near term. This will make US exports abroad more expensive and imports to the US less expensive, creating a drag on growth.

But domestic demand, particularly consumer spending and housing, are the primary drivers of current US growth, and so the impact of the stronger dollar will be muted. It is worth noting that the significant downturn in financial markets to start the year did not lead to either a US or global recession, so we do have a recent precedent for optimism about the ability of the global economy to withstand shocks.

Somewhat offsetting this will be lower interest rates, making it less expensive for US businesses and consumers to borrow. Rates have already come down dramatically in the wake of the Brexit vote, with the yield on the 10-year Treasury falling to around 1.40% at one point today, near its all-time low of 1.38 hit in 2012.

 

Financialtribune.com