Last Week's Highlights

Data this week showed the domestic expansion is continuing, but not by opening up many new jobs. The Conference Board Leading Economic Index® for the U.S. rose again in May, but initial unemployment claims remain stubbornly high. And the economy is sailing into strong headwinds, such as less stimulus and inventory rebuilding. Fundamentally, nothing is changing the view that this is a very long and tough recovery from a very steep recession.

Tuesday, June 22

4:00am Euro-zone Consumer Confidence (European Commission)

Job and income growth prospects were not very good to begin with. Now with the crisis in financial markets very likely to slow the economy even further, it would not be surprising to see confidence levels fall again, after a relatively big drop in May. Perhaps a bottom can be reached this summer. That might help set the stage for a long, slow recovery in attitudes.

Wednesday, June 23

4:00am Euro-zone Purchasing Manager Index (Markit Economics)

Purchasing managers had been turning more optimistic. The indexes for both the manufacturing and service sectors had moved into positive territory. The question is how negative have expectations turned in the wake of the financial crisis. With growth prospects being revised down, confidence levels undoubtedly also edged lower. As is the case with consumer confidence, perhaps a brief downturn now will start to bottom out later this summer.

Thursday, June 24

4:00am Euro-zone Industrial New Orders (Eurostat)

New orders rose in both March and April. There likely was a drop in the ordering rate in April. Near-term prospects may hinge on the fall of the euro, making goods price competitive. The prospect of the euro-zone exporting its way out of troubled waters is a limited option, especially if the value of the euro falls further. But options are few right now.

8:30am Orders for Durable Goods (Bureau of the Census)

Domestically, the ordering pace has been a little stronger than expected through April. That's one of the chief reasons why the expectation is for new orders to show more than a 1 percent decline in May. And with the trend in orders moderating, and inventory rebuilding also slowing, industrial production this summer is likely to be at half the pace of this spring.

Friday, June 25

8:30am Gross Domestic Product (1Q — 2010) (Bureau of Economic Analysis)

Revisions to the quarterly estimates of GDP growth have been unusually large over the past year or so. The surprise this time around is that the initial estimate of 3.2 percent annualized growth was only revised to 3 percent as more data on trade and inventory came in. This second round of revision is very unlikely to change this picture. The current quarter may show less inventory building, but more business investment. The result is likely to be another 3 percent or so gain. But growth in both business and consumer spending is likely to be somewhat lower in the second half of the year, resulting in smaller gains in GDP.

THE SITUATION ABROAD

The Conference Board forecast has been that the euro-zone economy might struggle to grow as much as 1 percent this year or next. It's becoming clear that the problems in public deficit and the financial markets could shave growth prospects down to only 0.5 percent. Principally, some loss of confidence (both business and consumer) is negatively affecting spending and investing plans. Meanwhile, both the euro and export prospects are losing a little steam.

FACT OF THE WEEK

1.7 percent. Global population is expected to increase by about 1 percent per year over the next decade. But production, trade, and consumption of wheat or poultry could increase by 1.7 percent a year or not quite twice as fast, according to the OECD. The implication is that food production and consumption could be rising faster than population, in a global economic environment of perhaps 4 percent growth. This optimistic projection suggests rising living standards could prevail in the decade after the worst economic crisis in nearly a century. The downside risk to this scenario is what might happen to the cost of food relative to the total household budget.

QUESTION OF THE WEEK

If the global population is growing more slowly, and therefore aging, what is the impact on savings and therefore on investment?

Population growth has actually been slowing for the past three decades, in both the developed and developing world. Standard theory suggests that young people don't save as much as the middle-aged, and older people start spending the money they saved all their working lives. The slowing and aging population, by definition, means more older people are spending their savings and there are fewer younger people saving.

Japan is a prime example. Its population is already in slow decline. The impact on savings in Japan has been dramatic. Three decades ago, the Japanese saving rate was 15 percent or higher. Today, it has slowed to less than 5 percent. It is not necessarily the case that the young Japanese are no longer saving money. Rather, the dramatic decline in saving is the consequence of a dramatic change to a slowing and aging population.

All this makes the change in saving rate in the United States that much more surprising (see the March issue of StraightTalk®). Yes, the U.S. population growth rate has slowed. But the post-recession saving rate has actually gone up. And in fact, as shown in the accompanying chart, today the average American household is saving more than the average Japanese household. If one had forecast such a development decades ago, it would have been dismissed out of hand. And that's one more reason why forecasting is so hazardous.