Last week: The economy may be losing steam. Certainly, it is sailing into strong headwinds. The industrial core spent much of the first half of 2010 redressing depleted inventory. At midyear, the inventory-to-sales ratios are closer to normal, suggesting there will be less inventory rebuilding in the second half of the year. Meanwhile, on the demand side of the economy, spending will have to cope with no more “clash for clunkers” or “first-time home buyer tax credits.” This will probably result in reduced GDP and job growth. The latest data from The Conference Board Leading Economic Index® for the U.S. is pointing precisely in this direction.

THE SITUATION ABROAD

One major concern across the globe is the lack of economic momentum. With few exceptions (China and India among them), consumption and investment are not rising robustly. There are few reasons to believe the pace will pick up. Financial market concerns continue to influence lending. One area where this shows up very clearly is in trade statistics — since a significant share of trade is financed. The volume of exports increased by 3.2 percent in the first quarter of 2010 – compared to 4.7 percent in the fourth quarter of 2009, and 5.8 percent in the third quarter. The pace is not likely to improve in the second quarter of this year, or even in the second half of 2010. Indeed, fiscal consolidation in the Euro-zone might even result in some slowing.

FACT OF THE WEEK I

143. Home and car sales may be weak, but sales of hard cover books are up significantly in the last year. And, Amazon reports that it sold 143 Kindle books for every 100 hard copies over the past three months. Newspapers and magazines are struggling to make money in this economic environment. But in the book publishing industry, sales of both old fashioned, turn-the-page, and new-fangled, electronic books, are thriving.

FACT OF THE WEEK II

86. The euro fell as low as 1.21 to one dollar, in the wake of the Greek crisis. It has since recovered to nearly 1.3 this past week. Meanwhile, the yen has appreciated to almost 86 at one point this past week. Japanese exporters generally say that they can remain profitable as long as the yen doesn’t go higher than 90. That breakeven point was reached briefly this past week. Moderating industrial output in the U.S., with no uptick in the service sector, is one reason why the euro and the yen appreciated a little in recent weeks. Whether the euro can stay at about 1.30, and the yen can remain at 90, and for how long, remain in question. Exporters – European or Japanese – would be better off without the currency appreciation.

QUESTION OF THE WEEK

Home prices in China have gone up nine fold in the last decade. Does this mean there is a housing bubble about to burst? Can it send the global economy back into a deep recession?

With its economy consistently rising by 9-11 percent per year over the past decade, prices in the fast growing metro areas have risen very sharply. Whenever the trend is this sharp, it leads to some speculation — essentially a bet on reaping profits as prices continue to rise. It also leads to a sharp run up in prices relative to income. Too steep a ratio between prices and incomes tends to generate bets that prices will not continue to rise sharply.

This may result in a period of price correction. The impact on the Chinese and global economies are unlikely to be on the scale of the housing bust in the U.S. Many homes in China (where one buys the building but not the land) are purchased with at least one-third of the price as a down payment — compared with 20 percent for a typical mortgage in the U.S. Down payments on a second home are even higher. About one quarter of homes are purchased in cash.

Only modestly priced homes are purchased with as little as 20 percent down. Thus, even with a sharp price correction, there is unlikely to be a consequent mortgage problem, leading to large-scale foreclosures. In turn, the international financial market is not burdened with risky mortgages. Instead, a sharp downturn in housing, if it happens, would slow the overall Chinese economy. The more important consequence would be a slowdown in prices and imports of construction materials.