September 10, 2009

Economic Outlook: A momentary balance

Markets around the globe were mixed Thursday after the U.S. Federal Reserve issued its most optimistic economic summary since the recession began.

The Fed's Beige Book, a focused assessment of the U.S. economy divided into 12 federal bank districts, said economic activity showed signs of continued stabilization across the country in July and August. The 12 districts remained cautiously positive, about business conditions, the report said.

Manufacturing showed signs of improvement with a modest increase in new orders in four districts. Real estate markets showed progress, but the construction sector remained at low levels. No surprise, with the unemployment rate jumping to 9.7 percent, labor remained weak across all districts, the Beige Book said.

With a nod toward stabilization, oil ministers of the Organization of Petroleum Exporting Countries in Vienna settled on maintaining the status quo Wednesday, electing to keep production quotas unchanged with the price of oil hovering near $70 per barrel.

For oil producers, the balance lies in achieving a price that funds further energy development without subtracting from industrial and economic growth -- in other words, the balance lies at least in part in keeping their customers satisfied.

Accordingly, since the market remains over-supplied and given the downside risks associated with the extremely fragile recovery, the conference once again agreed to leave current production levels unchanged for the time being, OPEC ministers said in a statement.

IHS Cambridge Energy Research analyst Bhushan Bahree said oil prices had reached the sweet spot.

Both the producers and the consumers are content, he said told The New York Times. Nobody is complaining.

Most Asian markets reacted positively. The Shanghai composite index dropped 0.73 percent, while the Hang Seng index in Hong Kong rose 1.05 percent. The Nikkei 225 in Tokyo rose 1.95 percent. In India, the Sensex index rose 0.21 percent. In Australia, the S&P/ASX rose 1.07 percent.

In midday trading in Europe, the FTSE 100 in Britain fell 0.66 percent, while the CAC 40 in France dropped 0.38 percent. The DAX 30 in Germany rose marginally, up 0.06 percent. The pan-European DJStoxx index dropped 0.29 percent.

Investors on Thursday will look at weekly jobless claims and the U.S. trade balance figures from July, which economists predict will be little changed from the previous month with an expected deficit around $27 billion.

Imports are expected to rise as foreign automobile companies geared up for a boost provided by the federal cash for clunkers rebate program that provided as much as $4,500 for car owners who traded in for new vehicles with improved gas mileage. Exports are also expected to rise, partly due to the weaker U.S. dollar, which makes U.S. products cheaper overseas.

Against the dollar, the euro traded at $1.4552 Thursday, from $1.25 in November, making the weak dollar among the strongest influences in keeping the trade balance in check.

Money spent on Chinese coffee makers and Middle East oil cannot be spent on U.S.-made goods and services, unless offset by exports, said University of Maryland economic professor Peter Morici, warning the trade deficit, while showing signs of stabilization, still threatens to undermine a U.S. recovery.