US Outlook

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US Outlook
Lea Tyler and John Walker Oxford Economic
Forecasting

• November 2003
• Tel [phone]
• Email jwalker_at_oef.co.uk

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Normal service resumed?

• After three years of sub-par growth the world
  economy is expected to grow by close to 3.5 next
  year
• But this is a two speed recovery, with the US
  leading the way, Japan enjoying a cyclical
  upturn, but the Eurozone still spluttering along
• Policy continues to be very supportive in the US.
  In the Eurozone the gradual demise of the
  stability and growth pact offers some upside risk
• Risks to the forecast centre on the US imbalances
  and large exchange rate realignments

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US Outline

• Will strong growth be sustainable through 2004?
• What is happening to productivity?
• Policy problems looming?

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Tax cuts
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US financial assets Stocks
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UNITED STATES
INDUSTRIAL PRODUCTION
6
4
2
0
-2
-4
-6
1999
2000
2001
2002
2003
Percentage changes from previous year 3 months
moving averages lagged 9
months.
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UNITED STATES
LEADING INDICATORS OF ECONOMIC
ACTIVITY AND INDUSTRIAL PRODUCTION
6
Leading
10
indicators
(r.h.sc.)
8
Industrial
4
production
(l.h.sc.)
6
2
4
2
0
0
-2
-2
-4
-4
-6
-6
1999
2000
2001
2002
2003
Percentage changes from previous year 3 months
moving averages lagged 9
months.
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Forecast for US
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US Outline

• Will strong growth be sustainable through 2004?
• What is happening to productivity
• Policy problems looming?

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Reasons for better productivity

• Past it investment bearing fruit
• Firms trying to restore profitability
• Competitive pressures in manufacturing
• Data issues

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US Job losses

• Since the peak in output during the year 2000,
  2.7m jobs have been lost from US manufacturing
  a decline of 17.
• Investment good industries have taken the hardest
  hit, particularly the high-tech sectors
• Engineering metal goods -11
• Transport equipment -13
• Computers and electronics -25
• By contrast the decline in UK manufacturing
  employment has been 10, and the decline in the
  in the eurozone has been only 4.
• .

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Hourly Labour Costs In Manufacturing
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US Outline

• Will strong growth be sustainable through 2004?
• What is happening to productivity
• Policy problems looming?

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THE DOLLAR'S
DEPRECIATION
(from end-Febr. 2002 to early Oct. 2003)
Weight in
Per cent


bilateral
change
trade



Total
-10.6
...



vis-a-vis


18.2
20
Latin America
-4.4
20
East Asia
U.K.
-18.3
5
Canada
-19.3
20
-21.6
10
Japan
-36.5 15
Eurozone





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World current account positions
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Impact of a weaker US dollar

• Change in current account 2004 2005 2006
• Against Asia only
  10 35 50
• Against all major currencies 20 75
  120
• Assuming world demand is stable 7 150
  200
• price to market 230 320 390
• 20 on Euro, pound, Canadian dollar, Yen and
  Yuan. Other Asian currencies average 15.

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Impact of a weaker US dollar

• Change in current account 2004 2005 2006
• US 20
  75 120 Asia -25 -40 -35
• Eurozone -10 -30 -40
• UK -15 -45 -35
• Canada -5 -20 -40
• Sum of above -35 -45 -35
• Includes some gains for Latin America and other
  emerging countries.

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Summary

• Growth set to remain strong in short term but
  some slowing into 2005
• The remarkable strength of productivity growth if
  sustained will have major implications for growth
  and inflation.
• The federal and current account imbalances are
  causes for concern and may well continue for some
  time but the situation is more stable than two
  years ago.

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Hourly Labour Costs In Manufacturing
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INDUSTRIAL PRODUCTION
(percentage changes from previous year

3 months moving averages)
8
Japan
6
Euro
zone
United
4
States
2
0
-2
-4
-6
-8
-10
-12
2000
2001
2002
2003
1999
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