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The U.S. Recovery Bucks International Headwinds

12:00 AM, Apr 2, 2011 • By IRWIN M. STELZER
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The jobs market continues to improve: 200,000 jobs were added in March. Corporate profits are exceeding forecasts for about three out of four firms, and the quarter that ended yesterday is the best first quarter for stocks in twelve years. Real consumer spending (adjusting for inflation) is up a bit, and researchers at State Street Global markets report that their index of investor confidence is up, with investors in North American the cheeriest of all. Better still, there is talk in Washington that the politicians are now serious about agreeing to spending cuts for this fiscal year, and to a longer-term combination of plans to rein in deficit spending. That would help to halt the decline in the dollar.

Wall Street

Unfortunately, that’s only part of the picture. Home sales remain over 9 percent below the level in 2010, even after a bit of improvement in February. Four million unsold homes overhang the market, and four out of every ten homes sold were put on the market by owners who could not pay the mortgage, or decided that the value of the home was so far below the mortgage that it paid to send jingle mail to the bank—an envelope containing the keys and a note, saying, “It’s all yours.” No surprise that prices continue to drop.

All of this matters so much because the effect of these woes is not confined to the housing industry. Home values make up an important part of total personal assets, and a depressed housing market has a negative wealth effect, cuts into spending, and has an outsized effect on consumers’ outlook.

Just as gasoline prices have an outsized effect on consumers’ perceptions of the level of inflation. Gasoline is a repetitive purchase; you watch the dials on the pump spin as you fill ‘er up; you see signs announcing rising prices as you drive to and from work and the mall; and you conclude that your income will be squeezed.

And you are right. Inflation is rising faster than incomes, leaving consumers worse off. Bill Simon, CEO of Walmart, the world’s largest retailer, says inflation is “going to be serious”: consumers will pay more for food, apparel, and most other items. The effect of the flood of dollars being turned out by the Federal Reserve Board, and rising wages in China and other Asian suppliers, are likely to hit consumers hard in coming months.

Developments beyond the control of U.S. policymakers are adding to a growing sense of unease. As HSBC Global Research put it in its latest update, “International developments create uncertainties for US outlook.” So the bank lowered its growth forecast and raised its guess at the inflation rate.

Periodic oil price spikes seem to have been replaced by an oil price plateau. Even when Libyan production is restored, oil company executives and traders will remain fearful of the increased risk of supply interruptions associated with popular uprisings and rumblings in oil producing countries. Higher risk means demands for higher returns, which in turn means higher prices, especially since it now seems that Saudi Arabia no longer holds sufficient excess capacity to provide as robust a buffer against shortages as it once did.

Add another factor to the oil price equation: bribes. No, not the sort we usually think of when discussing who gets drilling rights, and where. These are paid to the increasingly restive people who threaten the illiberal regimes that control the great bulk of the region’s oil production. The Saudi rulers have decided that it is a good idea to share some more of the revenues from the kingdom’s oil sales with the people whose money it really is, and have upped benefits of various sorts by about $130 billion. That means that for the Saudi budget to remain in balance, the oil price cannot go below about $85 per barrel now, or below $100 by 2015, according to estimates by the Institute for International Finance. If $100 turns out to be the Saudis’ new price floor, the good old days of $50, $60, and $70 oil will become grist for the mills of economic historians, and of no relevance to economic forecasters.

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