NBK on the US economy

The flow of economic data from the US continues to suggest that the economy is recovering. Manufacturing activity in the New York Federal Reserve district improved substantially in November, with the general business conditions index climbing to a record-high level for a second straight month.

The Bank said in its Empire State Manufacturing Survey that this index rose to 41.01 in November from an upwardly revised 34.11 in October. Moreover, index for new orders and shipments also topped previous record set in October.

Businesses increased inventories by a seasonally adjusted $3.6 billion in September from August. This suggests that growth during the summer was even stronger than the supercharged pace initially estimated.

The US Government had announced last month that the nation's gross domestic product grew at a 7.2% annual rate during the third quarter.

The increase in September inventories suggests that businesses were less aggressive about clearing off shelves during the third quarter than estimated and instead produced more products to meet rising consumer demand.

As a result, it seems justifiable now to look for an upward revision to the third quarter GDP reading. Indeed, already some economists are speaking of a possible revision to 8% from the preliminary 7.2%. They also estimate that the fourth quarter will probably grow at a 4% annualized rate.

On the home building front, housing starts rose 2.9% in October from the month before to a seasonally adjusted annual rate of 1.96 million units, the highest rate of activity since 1986. This increased pace of construction activity provides some assurance that overall economic activity will not stumble in the fourth quarter after a booming third quarter.

In another sign that the job market is healing, the Labor Department said fewer people are filing new claims for unemployment benefits. Initial jobless claims decreased by 15,000 to 355,000 in the week ending November 15.

The Conference Board, a private research group, said its index of leading economic indicators rose 0.4% in October. This index tracks indicators that tend to be at the leading edge of coming trends in the economy, such as jobless claims, stock prices, permits for new building activity or new orders for durable goods. Thus, the story line is clear. The economy is recovering.

But there are other developments that need to be watched. The imposition of quotas on some imports of Chinese goods took the market by surprise. The Bush administration is already under attack for its steel tariffs.

The latest move worried currency markets and hammered the US Dollar to its lowest level ever against the Euro. Even Federal Reserve Bank Chairman Greenspan warned about the 'creeping protectionism' because it could undermine the nation's ability to support its huge international payments deficit.

Former US Treasury Secretary Robert Rubin has also warned against such protectionist moves citing the possibility of retaliatory measures from other countries.

He also warned about the US trade and fiscal deficits, saying the US has created a horrendous mess for itself, and it is exceedingly likely that there is a day of reckoning out there. He also expected the US dollar to continue to weaken either in a managed fashion or in a sharper fashion, the latter being more damaging to the economy.