A Bumpier Road Ahead For the US – MoneyWeek

Moreover,withtheUScurrentaccountdeficitstillmassivebutstabilizingatanestimated6。

3%ofGDPinthesecondquarterof2005,andtheUStradegapnarrowingby$1。

5billioninJuly,othersmayhopethatthecurrentaccountdeficitwillsoonpeakorevendecline,alleviatingtheimbalancesthemselvesandthusmutingconcernsoverhowtofinancethem。

Idisagreeonbothcounts。

First,analysisoftheprospectivebalancebetweenUSinvestmentandallsourcesofsavingsuggestsbiggerdomesticandoverseasimbalancesandthushigherrealinterestrates。

Thatcomprehensiveframework,ratherthanjustthecurrentaccountdeficitanditsfinancing,isonewaytocapturetheinfluenceofdomesticandglobalforcesoperatingonrealinterestratesandthedollar。

Second,ananalysisofthefactorsinfluencingtheUScurrentaccountdeficitsuggestthatitmayriseto7%ofGDPormoreoverthenextfewquarters。

Asaresult,theroadaheadtofinancingUSimbalancescouldbebumpierthanithasbeensofar。

Fourfactorsinmyviewwillchallengeeasyfinancing。

First,newfiscalstimulusaimedatcushioningKatrina’sblowandrebuildingdamagedhousingandinfrastructureintheGulfCoastregionhasjustbegun。

Congresshassofarappropriatedsome$62。

3billionforrelief,cleanupandrecoveryinNewOrleansandthebroaderregion。

Amongotherneeds,thesefundswhenspentwillcovertemporaryhousingandcashassistance。

MoreoverthePresidentjustpromisedamassiverebuildingeffortthatdoubtlesswillrequirefurtheroutlaysatalllevelsofgovernmentandwilllikelyincludeadditionalsignificantFederalfunding,wideningtheFederaldeficitby$100billionormore。

ThisstimuluswillprobablyspurUSdomesticdemand,tightenlaborandproductmarketsandraiseinflationrisks。

Thus,ourrecentlyreleasedforecastupdateforUSgrowthof3。

8%overthefourquartersof2006isprobablytoolow。

Asaresult,theFedmayactuallyhavemoreworktodoin2006thananyonethoughtamonthago。

Second,UScorporateexternalfinancingneedsarerisingandanincreaseinpersonalsavingseemslikelytocomeslowly。

Twofactorswilldeterminehowfastcorporateexternalfinancingneedswillrisethough2006:thedirectionofprofitmarginsandgrowthincapitalspending。

True,thebroadestmeasureofeconomy-wideprofitsgrowth—so-calledafter-tax“economic”profits—acceleratedto11。

5%year-on-yearinthesecondquarter。

Butprofitmarginshavebeguntoleveloffasearningsandtheeconomy’sgrowthratesconverge。

Ithinkfadingoperatingleverage,risingunitlabour,energyandmaterialscosts,risinginterest,healthcareandpensionexpense,andanearningsheadwindfromthe“translationeffect”ofarisingdollarwillholdbackearnings。

Andtheeffectivecorporatetaxratehasrisenwiththeendofthe“bonusdepreciation”subsidy。

Atthesametime,capitalspendinggrowthslowedearlyin2005asthosetaxsubsidiesvanished。

Butinmyview,pent-updemandforcapitalspendingwillcombinewitharenewed,stepped-uppaceofinventoryaccumulationtoliftfinancingneeds。

Fortheirpart,consumerslikelywillcontinuetodefendtheirlifestylesinthefaceofrisingenergyprices,slowingwhatIthinkwillbeaneventualriseinthepersonalsavingrate。

Third,improvinggrowthinJapanandEuropeimpliesthatthoseeconomieswillbegintousemoreoftheirownsavingsathome。

Second-quartergrowthprovedtobestrongerthanexpectedinJapan,courtesyofrobustdomesticdemand。

Notwithstandingourcautionaboutglobalgrowthinthewakeofhigherenergyquotes,ourJapaneseeconomicsteamhasraisedtheir2005realgrowthforecastto2。

4%。

AndwhileEuropeangrowthwillslowundertheweightofhigherenergyquotes,ourEuropeanteampointsoutthattheregion’seconomiesalsopossessedsignificanteconomicmomentumtocountertheenergyshock。

Byshiftingtheglobalsaving-investmentbalance,thesedevelopmentsmayliftUSandglobalrealinterestrates。

Finally,IthinktheUScurrentaccountgapwillwidenbyearly2006to7%ofGDPormore。

Severalfactorsareatwork。

Dauntingdeficitarithmeticlocksthegapintoaviciouscirclethatishardtoescape;exportsmustgrow40%fasterthanimportsjusttoholdthecurrentaccountconstant。

Despiteafirmerdollar,non-fuelimportpriceshaverisenbymorethan1%thisyear,whichwidensthecurrentaccountdeficitinnominaltermsbeforeitnarrows。

SoaringoilpriceshavebloatedthenominalUSimportedenergybill,addinganestimated$50billiontothecurrentaccountgapduringtheyearendedinJune。

Wenowexpecttoseecrudequotessome$20/bblhigherin2006thantwomonthsago,whichwilladdanother$60billionnextyear。

A100basis-pointrenormalisationofUSinterestratescouldwidenthecurrentaccountgapbyupto0。

7%ofGDPinthenexttwoyearsaspaymentstoforeigninvestorsandcentralbanksrise。

FiscalthrustmaywidenUS-overseasgrowthdifferentials,andthatgrowthgapputsAmerica’ssurplusesinservicesandinincomereceivedfrominvestmentsabroadatrisk。

Infact,theUSsurplusonnetincomeplungedoverthepastyearfrom$60billionto$15billion。

Reconcilingtheseforcesinmyviewimplieschangesinassetprices。

Inparticular,theshiftinthesaving-investmentbalancewilllikelydriveupUSrealrates。

Butvolatilityandrealinterestratesmayriseglobally,testingriskyassetmarkets。

Nonetheless,giventhegrowthdynamiclikelytosupportreasonablegainsinearnings,Ipreferequitiesoverbonds。

AsIseeit,thesefactorsadduptoatugofwarforthedollar。

RisingUSinterestratesandstrongerUSgrowthwillsupportit。

Higherinflationandagrowingcurrentaccountdeficitwillundermineit。

Butit’sworthnotingthatportfolioshiftsacrossmarketsmaynotfollowimbalances,ormaydivergefromthemforawhile。

Forexample,mycolleagueStephenJenarguesthatstrongerJapanesegrowthwillreduceriskaversioninthatcountryandtriggeroutflows。

Therearerisksonbothsidesofthisscenario。

Thesheersizeofourcurrentaccountgapandofourdomesticsavingshortfallisdaunting,butthestrongbidforoursecuritiescouldcontinueforawhilelongerwithlittlemarketdisruption。

Ultimately,however,whetherinvestorslikeoursecuritiesrestsontheirconfidenceinourpolicies:Aretheyappropriate?

Aretheysustainable?

Willshocks—likethosefromKatrina—upsetadelicatebalance?

Afterbeingunfazedaboutmountingdomesticandexternalimbalancesforseveralyears,Inowsuspectthatthelimitsmaybecloserthanmanythink。

ByRichardBerner,MorganStanleyeconomist,aspublishedontheGlobalEconomicForu

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