G3 Recap 6-8-11

Main Items:

  • Fed Beige Book was pretty tame. “Wide spread improvement” in credit quality and gradual labor and wage growth were reported.

Overseas:

  • Japanese Eco Watchers Survey Outlook improved to 44.9 in May vs 38.4 prev. This is not far from the highs of 47 it hit in Feb.
  • Swiss UE fell to 2.9% in May vs 3.0% exp. and 3.1% prev

Commentary:

  • Dudley:
    Ultimately, the composition of economic activity in the United States needs to be rebalanced. There are two issues here. First, the consumption share of GDP may still be too high. Second, the need for U.S. fiscal consolidation implies that there will have to be offsetting increases in investment and the U.S. trade balance as the recovery proceeds. To illustrate this second point consider the following accounting identity: The public sector balance + the private sector balance = the current account balance. Right now the identity holds as roughly: -10 percent of GDP public sector balance + 7 percent of GDP private sector balance = -3 percent of GDP current account balance. If the public sector balance must over time move from around -10 percent to around -3 percent to stabilize the federal debt-to-GDP ratio at tolerable levels, then the private sector balance and the current account balance must move by roughly 7 percentage points of GDP to take up the slack. Assuming that the consumption share of GDP still needs to fall over the medium term, the adjustment in the U.S. private balance will have to occur primarily in terms of rising residential or business fixed investment.
  • The Japanese Eco Watchers survey has turned up sharply from its lows. This suggests better prospects for both the Japanese economy as well as for the Nikkei vs S&P trade:

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