Article 1: Consumers are downbeat on the economy – Sentiment drops to a 28 year low; housing starts rise, by Sudeep Reddy
This article reports a fall in consumers’ sentiments about the economy caused primarily by a combined effect of rising inflation as well as an unimpressively performing job market. It also reports a mixed performance of the housing starts in that while housing starts for multifamily apartments and ‘townhomes’ have been observed to be rising, housing starts for single family units have been on the decline.
The fall in consumers’ sentiments is essentially a reflection of falling consumer expectations about the economy. Consumers’ expectations play a very important role in determining the aggregate demand of an economy which in Keynesian theory is admitted to be the primary driver of income and employment growth. This fall in consumers’ expectations about the future performance of the economy has, according to the article been driven primarily by the recent hike in the general price level and unimpressive employment conditions.
This rise in the price level has been caused by a sudden oil price shock. This oil price shock has been reflected in the form of rising gasoline prices. This rising price level is significant as it has contributed considerably in raising inflation expectations among the consumers. The true significance of this inflationary situation becomes more apparent once one starts considering the implications this has on the interest rates. Inflations is likely to increase interest rates which itself in turn adversely affects consumer spending. As reported in the article this inflationary situation is likely to make the Fed’s job of reducing the interest rates to the benchmark and further, sustaining that very difficult.
The adverse effects of the falling expectations are reflected in the falling housing market starts for the single family units. The rising housing starts for multifamily units are also expected to fall as there has been an accumulation of inventories, which under the present situation are likely to be worked off.
Article 2: Fed asks to Now Pay Interest on Reserves by Greg Ip
This article reports the Fed’s request to accelerate the date since when it is officially permitted to pay interest on reserves. This is essentially a monetary policy that shall allow the Fed better monetary control over the economy.
Receiving interest payments on their reserves with the Fed shall motivate the commercial banks to hold more reserves with the Fed rather than lending out the excess reserves for lesser interest rates to the market. This would in turn make maintaining the Fed’s targeted federal-funds rate benchmark of 2% easier by preventing declines in the rate on overnight loans particularly on days when the system is “awash in cash”.
The Fed wants to attain such control on the money market to enhance the operating efficiency in regulation of inflationary trends. The interest payment scheme is primarily targeting a reduction in the excess reserves of commercial banks and enhancing control over credit creation. These are essentially motivated by the Fed’s monetary policy objectives of maintaining inflation at targeted levels through controlling the credit creation by the commercial banks. With the legislation in place, the commercial banks shall create lower credit as the amount disposable for loans shall be curtailed thereby leading to control on the overall consumer spending. This in turn shall put a downward pressure on the demand driven hikes on the general price level.
Article 3: Inflation to Cloud Mood at Mideast Forum by Marian Fam
The Middle-east nations have been hit by a surge in general price levels and this mounting inflation is turning out to be a major area of concern for these economies. This is an issue, according to the article, that is to be accorded primary importance in the forth coming World Economic Forum to be held at Sharm El Sheikh, Egypt.
The primary source of wealth for these economies is their abundance of oil resources. The oil price has risen from $65 a barrel in the last year to $100 a barrel presently. This steady surge in oil prices has led to raised incomes motivating consumer spending and investment sprees which have led to the price levels shooting up. This is essentially a situation of demand pull inflation. Because of such hikes in investment and consumer spending, aggregate demand is rising fast leading to rampantly rising prices.
Even the nations like Egypt and Jordan which are relatively poorer in terms of oil resources have observed inflows of large foreign capital in the form of FDI (Foreign Direct Investment) which has further contributed to mounting of the already high price levels. This investment boom along with the increased spending spree has led to a rise in prices of essentials such as food and is hence turning out to be a reason to be concern for the local Governments of these economies.
According to the IMF, average inflation rates are projected at 10.4 percent for the current year and according to official Egyptian figures, the inflation rate actually reached more than 16 percent at Cairo and other urban centers of the nation.
The inflation is causing significant reductions in purchasing power which has led to a number of unrests and riots over the region. To increase the purchasing power of the public and to thereby mitigate the crisis, the governments have adopted measures like raising government wages along with providing subsidies. Import duties have been reduced or totally removed over a broad spectrum of products to make them more financially viable for the public. But with the oil prices looking likely to increase further, these are only short run remedies and that too with meagerly responsive positive effects.
Article 4: Fannie Mae Will Reduce Down Payment Minimums
The private money market for housing loans is revising the down payment requirements downwards to stimulate housing market demands. The housing market has hit a low with prices falling steadily over a considerable length of time. The present article reports such down payment reductions by Fannie Mae, which according to the report is “the nation’s largest source of home financing.” These revisions are essentially targeted at making housing more affordable and to thereby generate higher demand for housing which can improve the deteriorating conditions for the market.
Down payment requirements will be equalized for borrowers over the country irrespective of the local market conditions by Fannie Mae. Certain other revisions that ease home financing and make it more affordable are also to be undertaken. With such changes, making house purchases shall be easier for consumers in monetary terms. This is essentially a reduction in the inter-temporal prices of home loans. With the affordability of home loans so raised, it is likely that demand for housing shall improve considerably. This demand stimulus is essential for the housing market which has hit a trough that reportedly is the worst since the days of the great depression. In pursuit of generating such a stimulus, apart from the aforementioned equalizations, a policy of accepting greater loan to value ratios has also been adopted.
Article 5: On July 4, Fewer Bombs Maybe Bursting in the Air
This article reports a supply shock in the US fireworks market and points out the possibility of an Independence Day celebration that features lower fireworks displays than traditional. A supply chain problem caused primarily by a variety of shipping difficulties is the main reason behind this possibility.
China is the main supplier of the fireworks, and due to shipping failures a bulk of the imports are yet to reach the American suppliers. The shipping failure is a result of legislative bans by the Chinese government of a large number of explosives and other hazardous material as well as the discontinuation of Hyundai Merchant Marine, a shipping corporation which faced a devastating fire in 2006 while shipping fireworks, leaving Maersk to be the only shipping line operational as transporter of fireworks. The article reports the fact that large consignments not only have left factories of Liu Yang, a city in the Hunan province of China that accounts for more than 95 percent of the fireworks sold in the USA. This supply shock has actually contributed to a price rise for the products in the wholesale market which has been beneficial for the Chinese manufacturers. The prices have also risen due to increases in production costs due to increased prices of raw materials and labor. Shipment costs have also risen thereby contributing to the price hike.
Though most US based firework suppliers have been badly hit by this supply shock, due to ordering early, B.J Alan and Co. have benefited significantly. With other distributors low on supply, the strong inventory position of this company not only lends him the opportunity to capture a significant share of the market at higher prices, it also opens up the possibility of arbitraging to the other distributors.
The market has an inelastic high demand for fireworks products with the Fourth of July celebrations approaching fast and given the supply shortage, a possibility of an underground market emerges. With the huge excess demand to feed, black markets have strong incentives to operate. To prevent such a turn of events and rescue the industry from a potential crisis, the US government has initiated discussions with the Chinese government to rethink the ban.