LOWER RATES IN EUROPE COULD HELP THE U.S. ECONOMY
United Europe is starting to resemble the Tower of Babel: It's not getting built because each country is being forced to talk in a different currency. But despite the foreign-exchange disarray and the whole Maastricht mess (page 34), Europe's internal squabble will not affect the U.S. economy anytime soon. When it does, it's more likely to help than hurt.
The ongoing problems facing the U.S. economy are all right here at home. On balance, the latest data paint a picture of sluggish U.S. growth, probably through the end of the year. The main reason is the poor financial condition of consumers. Households are still burdened by a stack of ious, and their dim employment prospects generate little hope for relief any time soon.
Clearly, the outlook is uninspiring, but if you think it's any worse than that -- headed for another dip into recession, perhaps -- look at the latest housing data. While currency traders stay awake nights mulling over the turmoil in Europe, many builders in the U.S. are sleeping a little easier. That's because housing activity showed a lot more life in August, and the pickup should extend into the fall.
Housing starts jumped by 10.4%, to an annual rate of 1.24 million (chart). That was the biggest monthly gain in 18 months, and pushes starts up to their highest level since March. So far this quarter, homebuilding is running at a 13% annual rate above its second-quarter pace.
The August gain was broad. Single-family starts rose 8.5% in the month, more than erasing two smaller declines in June and July, and multifamily units also increased. All regions except the Northeast posted gains.
The large advance in starts suggests that the year-and-a-half-old housing recovery -- which had sputtered in the spring -- is once again fired up. True, the rebound is not as strong as past upturns, but any growth in housing will have a broad impact on the economy.
One reason that the housing recovery has been muted is demographics: Fewer new households are being formed in the 1990s than in the two previous decades. Also, past overbuilding of apartment projects has hurt that segment of housing. In the last three housing rebounds, multi-unit starts grew by a torrid 89% in the first 18 months. This time, they have gone nowhere since early 1991, and that's where they'll be until developers can work down the glut of existing apartments.
The jump in mortgage applications for home purchase in July telegraphed the rise in August housing starts. Moreover, loan applications have remained at a relatively high level into September, suggesting that the strength in housing demand should carry through into the fall.
That bodes well for consumer spending on home-related durable goods. Purchases of furniture and building materials sagged in August, but stronger housing numbers suggest that buying bounced back in September.
The reason for the uplift in housing is falling mortgage rates, dating back to the Federal Reserve's easing of monetary policy on July 2. The average fixed rate on a 30-year mortgage has dropped from 8.52% at the end of June to a 19-year low of just under 8% by late August (chart). Rates have stayed down in September, which will help home buying in the fall. But as long as consumers are struggling financially, the impact of lower rates will be limited.
Builders expect sales to pick up in the future. The National Association of Home Builders says 31% of its members surveyed in September expect new-home sales to be good during the next six months. That's up from 28% in August.
Even with builders feeling more upbeat, starts may look shaky in September because of Hurricane Andrew. The Commerce Dept. notes that Andrew had a minimal effect on August housing starts. But the September data are likely to show a drop-off in construction in the South.
In coming months, however, rebuilding in southern Florida and Louisiana will boost those areas' building activity. Also, the data on construction employment may be skewed, as carpenters and roofers from other parts of the country headed south looking for work.
While the U.S. economy struggles to recover, Europe is wrestling with its own problems. As it turns out, the fall of communism is creating European disunity. Germany's burgeoning costs of reunification, coming at a time of weak economies and increased nationalism throughout Europe, have destabilized the currency markets and derailed efforts to forge the monetary and political union of the European Community.
What does all this mean for the U.S economy? In the short term, very little, except for increased volatility of the dollar on foreign exchange markets. That could roil the financial markets from time to time.
But despite the dollar's initial strength during the breakdown of the European currency agreements, the fundamental pressures on the greenback remain downward. The dollar's underlying frailty reflects the still-wide spread between U.S. and German interest rates, the weak U.S. economy, and political uncertainty surrounding the Presidential election.
Moreover, currency traders are looking with increased favor on the Japanese yen, especially in light of Japan's big package of fiscal stimulus and the subsequent rebound of the Japanese stock market. The yen hit a record high against the dollar on Sept. 23.
Looking further ahead to 1993, current European churning could lift U.S. exports. One by-product of the currency disarray may eventually be lower European interest rates, which will help
Europe's economies get back on track (chart). In addition, the weaker dollar will make U.S. goods more competitive in price.
A healthy Europe is important for U.S. exports because those countries make up the largest foreign market for U.S. goods. Through July, Europe bought 27% of all U.S. exports. But most analysts believe that a stronger Europe is at least a year away.
In the meantime, U.S. companies are concentrating on other sources of foreign demand. Although exports fell 2.2% in July, to $ 37.3 billion, they had surged 6.9% in June to a record level. The six-month trend of price-adjusted exports continues to move ever higher (chart), buoyed mainly by stronger shipments of capital goods.
Two fast-growing markets are the developing nations in Latin America and along the Pacific Rim. Through July, developing countries bought 37% of U.S. exports, but during the past year they have accounted for 80% of U.S. export growth. As a result, while the U.S. trade surplus with Europe has shrunk by $ 4.1 billion in the past year, some of that drain on our overall merchandise trade gap has been made up by the $ 3.2 billion narrowing in the U.S. deficit with the developing nations.
Still, the U.S. trade gap continued its recent trend of deterioration in July. It widened sharply to $ 7.8 billion from $ 6.7 billion in June. In addition to the month's drop in exports, imports rose 0.6%, to a record $ 45.2 billion, after a big advance in June. In fact, imports are responsible for all of the deficit's widening in recent months.
Since March, price-adjusted imports have grown at a double-digit pace from a year ago. A pickup in imports of consumer goods has accounted for most of the recent speedup, perhaps reflecting ordering earlier this year, when recovery signals were stronger. If so, many of those foreign goods are being held in inventory right now, suggesting that import growth in coming months is likely to slow.
To be sure, Europe's monetary mess shows just how integrated the global economy has become. However, other than volatility in the currency markets, Europe's problems will stay on its side of the Atlantic. Here in the U.S., the economy's biggest problems are all homegrown, and solving them is going to take time.JAMES C. COOPER AND KATHLEEN MADIGAN