The housing market is gradually fading as a prop for the US economy, eroding a source of wealth that allowed consumers to borrow and spend avidly in recent years.
Meanwhile, the bond market, where short-term interest rates are now slightly above long-term rates in what is known as an inverted yield curve, suggests that the economy is headed for a sharp slowdown, perhaps even a recession. The stock market rally earlier this year has petered out.
So why do most forecasters predict that economic growth will remain relatively strong this year? Perhaps because they are counting on other sectors that have been relatively weak -- particularly stepped-up business investment -- to help sustain the robust expansion of the last 30 months.
"I think the surprise will be that housing prices and housing sales will decelerate, but the economy will do just fine," said Richard Berner, chief domestic economist for Morgan Stanley.
Berner is not alone in his optimism. Despite some worrisome indicators, only a handful of the 53 economists surveyed by Blue Chip Economic Indicators predict that the growth rate this year will drop much below the 3.7 percent average of last year.
That outlook also assumes that consumer spending, deprived of the lift from rising home prices and mortgage refinancing, will not drop very much. Despite high debt levels, it is still safe to say that Americans will somehow continue to buy on credit, and with energy prices falling, wages now diverted to gasoline purchases should be freed up to spend on the array of goods and services that drives the economy.
"One of the big stories today is that people are so happy with US$2 gas," said Richard Curtin, director of the Surveys of Consumers at the University of Michigan, explaining a big jump in consumer confidence this month.
"There is nothing better than a relative price decrease," he said.
Forecasters are notorious for missing major turning points in the economy. Still, as home construction and home sales subside, and consumer spending eases off, most experts see a different powerhouse kicking in to keep the economy on its upward path. The prime candidate is capital investment -- the spending by business on all the equipment and facilities needed for production.
Business contributed powerfully to the boom of the late 1990s by investing generously in high-tech machinery and computers, but then cut back sharply in the dot-com bust, helping to weaken the economy. Now an upturn in this spending in the spring and summer months has raised expectations that corporate America has finally begun to replace aging and outdated equipment, drawing on record profits to do so.
"Business has tonnes and tonnes of capability to spend," said James Paulsen, chief investment strategist at Wells Capital Management in Minneapolis. "The longer the recovery keeps going and stock prices go up, the more and more confident business is going to become and the more it will spend on its operations."
The anecdotal evidence is mixed on this score. Verizon, for example, invested US$15 billion this year to expand its wireless system and start building a fiber optic network that will allow it to compete more directly with cable television providers. The same hefty sum is to be spent in the year ahead. But that is not enough. For the economy as a whole, matching last year's outlay, no matter how hefty, adds nothing to economic growth.
There must be more investment, and a new survey of chief financial officers, sponsored by Baruch College and Financial Executives International, suggests that there will be. Two-thirds said their companies planned to increase capital spending this year by 8 or 9 percent, a rise reminiscent of the late 1990s.
But Haas Automation in Oxnard, California, a big manufacturer of the machine tools installed in factories to cut and shape metal, expects sales to be only marginally better this year.
"Our customers are inhibited by the high cost of energy and steel," said John Roth, Haas' director of customer service, explaining the restraint he is seeing in capital spending. "They are concerned that the prices they are forced to charge make them less competitive."
Apart from capital spending, many forecasters expect contributions to growth from other sources. Exports should rise, partly in response to a weakening US dollar against the euro, the pound and the yen, and partly because Boeing is selling so many aircraft abroad.
DECOUPLING? In a sign of deeper US-China technology decoupling, Apple has held initial talks about using Baidu’s generative AI technology in its iPhones, the Wall Street Journal said China has introduced guidelines to phase out US microprocessors from Intel Corp and Advanced Micro Devices Inc (AMD) from government PCs and servers, the Financial Times reported yesterday. The procurement guidance also seeks to sideline Microsoft Corp’s Windows operating system and foreign-made database software in favor of domestic options, the report said. Chinese officials have begun following the guidelines, which were unveiled in December last year, the report said. They order government agencies above the township level to include criteria requiring “safe and reliable” processors and operating systems when making purchases, the newspaper said. The US has been aiming to boost domestic semiconductor
Nvidia Corp earned its US$2.2 trillion market cap by producing artificial intelligence (AI) chips that have become the lifeblood powering the new era of generative AI developers from start-ups to Microsoft Corp, OpenAI and Google parent Alphabet Inc. Almost as important to its hardware is the company’s nearly 20 years’ worth of computer code, which helps make competition with the company nearly impossible. More than 4 million global developers rely on Nvidia’s CUDA software platform to build AI and other apps. Now a coalition of tech companies that includes Qualcomm Inc, Google and Intel Corp plans to loosen Nvidia’s chokehold by going
ENERGY IMPACT: The electricity rate hike is expected to add about NT$4 billion to TSMC’s electricity bill a year and cut its annual earnings per share by about NT$0.154 Taiwan Semiconductor Manufacturing Co (TSMC, 台積電) has left its long-term gross margin target unchanged despite the government deciding on Friday to raise electricity rates. One of the heaviest power consuming manufacturers in Taiwan, TSMC said it always respects the government’s energy policy and would continue to operate its fabs by making efforts in energy conservation. The chipmaker said it has left a long-term goal of more than 53 percent in gross margin unchanged. The Ministry of Economic Affairs concluded a power rate evaluation meeting on Friday, announcing electricity tariffs would go up by 11 percent on average to about NT$3.4518 per kilowatt-hour (kWh)
OPENING ADDRESS: The CEO is to give a speech on the future of high-performance computing and artificial intelligence at the trade show’s opening on June 3, TAITRA said Advanced Micro Devices Inc (AMD) chairperson and chief executive officer Lisa Su (蘇姿丰) is to deliver the opening keynote speech at Computex Taipei this year, the event’s organizer said in a statement yesterday. Su is to give a speech on the future of high-performance computing (HPC) in the artificial intelligence (AI) era to open Computex, one of the world’s largest computer and technology trade events, at 9:30am on June 3, the Taiwan External Trade Development Council (TAITRA) said. Su is to explore how AMD and the company’s strategic technology partners are pushing the limits of AI and HPC, from data centers to