For the week, benchmark Treasury yields fell 5-31bp, with the long bond outperforming and the front end lagging (though with the 2-year and 3-year yields hitting record lows Thursday). The 2-year yield fell 7bp to 0.29%, 3-year 5bp to 0.50%, 5-year 12bp to 1.25%, 7-year 19bp to 1.92%, 10-year 25bp to 2.55%, and 30-year 31bp - a 5.5% surge in price terms - to 3.82%. While the bulk of the huge rally at the longer end over the past two weeks has still been in real rates, declining inflation breakevens explained more of the upside in the past week as commodity prices fell sharply - 4.5% for the overall CRB index, 9% for front-month oil and 9% for the base metals. The 5-year TIPS yield rose 13bp to -0.67%, the 10-year yield fell 4bp to 0.32%, and the 30-year yield fell 13bp to 1.24%. Shorter-end real rates moved significantly higher and breakevens fell dramatically as much lower near-term inflation was built in based on the energy price weakness, with 2-year TIPS yields up about 45bp and inflation breakevens down 50bp. Some significant disruptions in money markets before the debt ceiling was resolved quickly gave way to a return to the prior T-bill squeeze after the debt limit was extended. Short-dated bill yields maturing around the key areas of debt ceiling uncertainty in August saw their yields move over 0.30% before the debt ceiling deal was approved, but both the 4-week and 3-month bill yields ended the past week barely above zero, and the 6-month yield plunged 12bp to 0.04%. The overnight Treasury general collateral repo rate similarly plunged from a daily average of 0.29% Monday to only 0.015% Friday. As limited as the debt ceiling increase was, the Treasury said at the refunding announcement that there was no room for resumed SFP bill issuance at this point to try to ease the T-bill supply/demand imbalance. And the BNY Mellon move towards negative interest rates on cash accounts had investors wondering if this approach could spread more broadly in the banking system and potentially whether the Fed might cut the current 0.25% interest rate on excess reserves into negative territory, which would probably lead to money market rates broadly turning negative.
The concerns about the US economic outlook and the continued debt crisis in Europe that sharply boosted Treasuries also hit risk markets hard. The S&P 500 lost 7.2% on the week. All major sectors were way down, with energy (-10%), materials (-9.5%) and financials (-9%) doing worst. The investment grade CDX index widened 7bp to 103bp and the high yield index 87bp to 582bp. While the US economic outlook and implications for Fed policy were somewhat more of a focus in rates markets, the most important negative for risk markets seemed to be the worsening European debt crisis. As bad as the US losses were, an 11.1% sell-off in the Euro Stoxx 50 equity index and a 19bp widening to 126bp in the iTraxx Europe CDX index were worse. There was improvement Friday on rising hopes that the ECB would start buying Italian government bonds after initially revived buying was only in Irish and Portuguese debt, but for the week the pressure on Italian, Spanish and now even French yield and CDS spreads was still substantial. Italy's 5-year CDS spread rose about 70bp on the week to 380bp, Spain 55bp to 410bp, and France over 20bp to 144bp, all hitting record wides Thursday before narrowing somewhat Friday.
Non-farm payrolls rose 117,000 in July, and June (+46,000 versus +18,000) and May (+53,000 versus +25,000) were revised higher. Payroll gains were led by manufacturing (+24,000) as auto production rebounded from supply-chain disruptions, retail (+26,000), leisure and hospitality (and a typically strong gain in healthcare (+37,000). Government (-37,000) remained the major area of weakness, added to temporarily this month by the Minnesota government shutdown. Temp help also extended a soft recent trend, holding unchanged in July after modest declines over the prior three months. In addition to the better result for payrolls, other details of the report were also broadly improved. The unemployment rate dipped a tenth to 9.1%. The more volatile household measure of employment fell 38,000, but adjusted to be more comparable with the payroll survey definitions it was up 47,000. The average workweek was steady at 34.3 hours, which along with the gain in payrolls resulted in a 0.1% rise in total hours worked. Average hourly earnings jumped 0.4% for a 2.3%Y gain, up from +1.7%Y in December. The acceleration in average earnings this year suggests that there is not as much slack in the labor market as suggested by the high unemployment rate, as the severe shock to the economy during the recession appears to have resulted in substantial mismatch between the skills of unemployed workers and available jobs. The jump in average hourly earnings combined with the rise in total hours worked resulted in a 0.6% surge in aggregate weekly payrolls, a proxy for total wage and salary income growth.
The better-than-expected employment report probably takes an immediate policy change off the table at Tuesday's FOMC meeting. Instead, we suspect that members will have a broad discussion of easing options, which we would see details of when the FOMC minutes are released in three weeks, and the post-meeting statement may suggest the possibility of additional monetary stimulus under certain conditions depending on developments going forward in growth and inflation. The recent trend in jobless claims, combined with the temporarily laid off Minnesota state government workers returning, suggests that we could see a better overall employment gain next month. And fears of widespread job losses caused by the impasse over funding for the Federal Aviation Administration (FAA) have been alleviated with the shutdown now having been resolved. However, we continue to believe that a stronger pace of job growth will eventually be needed to sustain economic recovery over the long term, at least 150,000 monthly job growth before too long to support an at least gradually declining trend in the unemployment rate and enough consumer income growth to support moderate consumption growth. So, while the inflation environment is much different than a year ago when the Fed embarked on QE2, any signs of a faltering labor market over the next few months could prompt new monetary stimulus actions.
Prior to the terrible GDP report released on July 29, we had thought 1H growth ran near 2%, with the negative impact of the supply-chain disruptions and energy price spike lowering growth by more than a point, pointing to the potential for a pick-up to 3.5% growth in 2H as the drag from these temporary disruptions moderated. This would have left average growth for all of 2011 near the steady, modest pace in 2010, which previously showed 2.7% GDP growth in 1H and 2.8% in 2H. Now the revised GDP figures show growth slowing from +3.9% in 1H10 to +2.4% in 2H and only +0.8% in 1H11. So, it turns out that the economy has been losing significant momentum over the past year and the growth in 1H11 was quite sluggish even accounting for some temporary drags. We still think there is a likelihood of some improvement in growth in 2H, with support from a rebound in the motor vehicle sector as supply disruptions are worked through and from lower gasoline prices, but from a much more sluggish underlying starting point.
There were somewhat mixed indications for near-term growth released through the past week. On the positive side, the auto rebound story remains very much on track. Motor vehicle sales jumped to a 12.2 million unit annual rate in July from 11.5 million in June, a good start to a recovery from the supply-driven pullback in sales from 13+ million levels earlier in the year. Along with the upside in sales, automakers released revised production schedules, and they continued to point to major near-term upside. Based on industry-wide North American assembly schedules compiled by Ward's Automotive and the Fed's seasonal factors, we expect US car and truck assemblies to be up 16% sequentially in July and then somewhat more in August and September, pointing to about a 1.5pp positive contribution from this sector to 3Q GDP growth. On the negative side, the personal income report showed a surprisingly low zero reading for real spending in June after slight declines in May and April, providing a weak starting point for 3Q consumption, and chain store sales results overall in July showed a significant slowing in growth from strong June numbers, pointing to sluggish ex auto retail sales last month.
At this point, we see 3Q consumption running at +2.2% compared to our prior +2.9% estimate. We see overall 3Q GDP growth at this early point tracking near +3%. The expected upside in strength in the auto sector (which should be seen in consumption, inventories, and business investment in the GDP data) should be added to by modest upside in ex autos consumption and a decent gain in business investment (with a solid construction spending report for June showing quite strong recent results for business construction spending). We are still updating our GDP outlook, but at this initial point we see GDP growth for the whole second half at around +2.75% annualized, compared to our prior +3.5% estimate, with 4Q now more likely to slow from 3Q than accelerate. Previously, we were looking for a substantial strengthening in business investment in 2H, with help from tax incentives, a still unsustainably low level of net investment, and extremely strong corporate balance sheet. We still look for decent 2H business investment, but with the damage done to sentiment by the messes in Washington and Europe, we no longer expect an acceleration. Motor vehicle sales are likely to show substantial gains in 2H as inventories of desired models are replenished, but much improvement in ex autos consumption in 2H, which we previously thought would see upside with help from lower gasoline prices, seems unlikely now. Instead, it now seems more likely that rising cautiousness will prompt consumers to boost savings somewhat further in coming months and businesses to keep piling up cash on their balance sheets. A more technical adjustment also lowers the outlook for 4Q growth. Prior to the GDP revisions, BEA was having consistent, major problems with seasonally adjusting real oil imports, with the result that every year from 2006-10 there was a major drop in real oil imports in 4Q and a resulting very predictable big contribution to 4Q GDP every year from net exports. This was largely fixed in the recent annual GDP revisions, however. We still think that slower domestic demand will suppress imports and solid export growth will continue, leading to trade making a positive contribution to near-term growth but much less so in 4Q now that this statistical anomaly has been fixed.
The economic calendar in the coming week is fairly light, with the retail sales report on Friday the key report. Focus will be mostly on the FOMC meeting Tuesday and in the Treasury market also the refunding auctions, $32 billion 3-year Tuesday, $24 billion 10-year Wednesday and $16 billion 30-year Thursday. These sizes were all unchanged, extending a stable run over the past year, but with the budget deficit showing significant year-on-year improvement in recent months, the Treasury indicated at the refunding announcement that sizes would start moving lower in coming months. Data releases due out include productivity Tuesday, the Treasury budget Wednesday, trade balance Thursday and retail sales Friday:
* We forecast a 1.2% decline in 2Q productivity and a 2.5% rise in unit labor costs. The measure of output that is relevant for the calculation of productivity posted a slightly better gain than overall GDP, but it still appears that 2Q productivity will register an outright decline. Correspondingly, we look for a moderate rise in unit labor costs. Also, we should see significant net downward revisions to productivity in prior quarters, reflecting the recent benchmark GDP revision. And this should be accompanied by upward adjustments to unit labor costs. Indeed, unit labor costs should be revised up sharply in 1Q (from +0.7% to about +4%), reflecting both a downward adjustment to productivity (to approximately -0.5%) and a sharp upward revision to compensation.
* We expect the federal government to report a $126 billion budget deficit in July, well below the $165 billion deficit recorded in July 2010, with revenues rising an estimated 2% from a year ago and spending falling 11%. On the revenue side, we estimate that withheld income and payroll taxes advanced 1%, with decent improvement in underlying withheld taxes mostly offset by the impact of the payroll tax cut. Meanwhile, individual tax refunds fell. The sharp expected pullback in spending partly reflects a calendar shift, as some early August payments were pulled forward into July last year. Underlying moderation has also been evident, however, in some cyclically sensitive areas like unemployment insurance and Medicaid. Moreover, defense spending has slowed. With the substantial improvement seen in the past few months, it now appears likely that the budget deficit for all of fiscal 2011 (ending in September) will be very close to last year's $1,294 billion. This should result in a narrowing as a percentage of GDP to near 8.5% - versus 8.9% in FY 2010 and 10.0% in FY 2009.
* We look for the trade deficit to narrow by $1 billion in June to $48.2 billion, with exports up 0.3% and imports down 0.7%. Export upside should be concentrated in capital goods, consistent with the decent gain in capital goods shipments. On the import side, lower prices and volumes should lead to a pullback in petroleum products from the record high hit in May, and a sharp deceleration in growth in inbound cargo through the key West Coast ports points to a slowing in other goods imports. On the upside, however, Japanese figures pointed to a very sharp rise in exports to the US as motor vehicle supply-chain disruptions eased. Note that our forecast is $1.5 billion better than BEA assumed in preparing the advance 2Q GDP estimate.
* We forecast a 0.7% rise in overall July retail sales, a 0.3% gain ex autos, and a 0.1% uptick in retail control. Motor vehicle sales rebounded in July, and service stations are likely to post a price-related advance. So, headline retail sales should register a better performance than seen in recent months. However, chain store results were mixed, with apparel outlets a particular source of weakness. Therefore, we look for only a fractional rise in the key retail control gauge that factors directly into the calculation of personal consumption.
Consensus estimates for US growth have trended downwards for 2011 since the beginning of the year, on the back of high uncertainty about US domestic demand, a weak labour market and still-depressed house prices. Further, over the last three months, consensus estimates for US growth for 2012 have declined. What does a US slowdown mean for the euro area?
The link between the US and euro area cycles has increased in recent years. In addition, empirical evidence indicates that the US leads the euro area by about six months. Yet, the strong co-movements of the US and euro area business cycles do not reflect the trade linkages alone. Rather, empirical literature suggests that the effects of financial and confidence channels are much more important, around three times the pure trade effects. Estimates indicate that a 1pp decrease in US growth would reduce euro area GDP by 0.1pp based on bilateral trade, while including all the possible transmission channels it would shave euro area GDP by up to 0.3pp.
Near term, this suggests that only a very marked slowdown in the US could have a significant impact on euro area activity. Still, the effects on activities of euro area multinational companies operating in the US, and hence their revenues, could be more significant. In addition, spillover effects through financial asset prices and confidence can take place quickly and may intensify the impact on companies' funding costs.
Should We Worry about a US Slowdown?
If the US economy was to slow down meaningfully, this would be a major concern for the euro area:
• First, the euro area faces strong headwinds already. The uncertainty is already elevated with the persistence of the sovereign debt crisis in the euro area periphery and the increasing risks of contagion. Moreover, oil and commodity prices are still at high levels. Hence, an additional shock would almost certainly weaken growth, notably in core countries. This, in turn, may worsen the already-deteriorated economic situation in the periphery, with the deterioration of external demand.
• Second, monetary policy in the euro area has little room for manoeuvre, with ECB policy rates still being very low.
• Third, fiscal policy is, for the whole euro area, constrained. For almost all the member states of the EMU, the high levels of fiscal deficits and debt-to-GDP ratios suggest that fiscal policy would not be able to meaningfully respond to any economic slowdown. Only a small number of countries whose public finances are in better shape, such as Germany, the Netherlands or Finland, would likely be able to respond to an economic downturn. However, even for them, the margin of intervention would probably be limited.
How Would a US Slowdown Affect the Euro Area?
The US and the euro area economies are interconnected via various channels: international trade, financial linkages and private sector confidence. Historically, the business cycles in the US have tended to lead the euro area cycles, suggesting that a slowdown in the US economy would ultimately spill over to the euro area.
The interesting question is how the strength of the linkages between the US and euro area cycles has evolved over the recent years. On the one hand, the increase in financial integration suggests that the spillovers of financial shocks have probably grown, especially given the significant share of the US in the global stock market capitalisation and debt securities (32% and 35%, respectively). On the other hand, the rising internationalisation of trade, especially the growing share of emerging economies, suggests a decreasing importance of the US, and that the euro area might further decouple from the US.
Stronger Co-Movements Between US and EMU
The US and euro area real GDP growth are strongly correlated. In particular, business cycles in the US and in the euro area have shown strong co-movements over the last four decades. What's more, the chart analysis suggests that US growth leads euro area growth by two quarters on average over the entire period.
Yet, the degree of relationship seems to have changed over time, being more or less strong during some sub-periods. The 5-year rolling correlation shows that the degree of co-movement between business cycles in the US and euro area has especially changed since the mid-1990s. Business cycle linkages have been the strongest during the current decade, the correlation being currently at its historical highest level. On the contrary, the linkages were weaker at the beginning of the 1990s. This is presumably due to the positive impact of the German reunification on euro area growth, while the US economy was falling into recession.
The detailed analysis by decade indicates how the relationship between the US and the euro area cycles has evolved. In particular, the estimated lag and lead correlations between the US and euro cycles confirm that the former leads the latter by about three quarters on average since 1980. Indeed, the correlation peaked at around 60% when the euro area business cycle lagged the US cycle by two quarters. The correlation was lower over 1990-94, as it fell to 30% at its peak, with the US cycle leading the euro area cycle by three quarters. The correlation between the US and the euro area increased significantly since the mid-1990s, reaching a peak at around 85%, and almost 90% with Germany. Yet, the lead for the US business cycle is only one to two quarters in the recent cycle, suggesting that the spillover to the euro area is probably quicker than in the previous decades.
A key question is whether the strong co-movements between cycles reflect euro area dependency on the US or simply common shocks. The high degree of correlation may indeed be due to common shocks hitting the US and the euro area at the same time. Still, since the mid-1990s, output in the US and euro area have shown high co-movements, whatever their position in the cycle. In addition, the US has always led the euro area, which suggests spillover from the former to the latter.
An in-depth analysis of the different channels of transmission of US shocks can hopefully shed some light on that.
Small Direct Exposure to the US, but Potentially Large Indirect Trade Linkages
The most straightforward channel of transmission of US shocks to the euro area is through trade. Hence, a slowdown in US domestic demand causes a deceleration in euro area exports to the US. Yet, the direct exposure of the euro area as a whole to the US economy seems relatively small in absolute terms, and it has decreased since the start of the 2000s. For example, the euro area exports of goods to the US, in nominal USD, which represented about 1.3% of GDP in 1990, significantly increased to reach 2.6% of GDP in 2000. Since the financial crisis, it has declined slightly to 2% of GDP in 2010.
Looking at country levels, the direct exposure to the US economies vary considerably. For example, Ireland has the highest exposure, with exports to the US amounting to 16% of GDP in 2010. The share of exports to the US of other euro area member states is much lower, less than 4% of GDP on average. Among the other economies that have a direct exposure higher than the average euro area, Belgium has the largest, with exports to the US representing 3.4% of GDP in 2010.
Overall, the direct exposures of the euro area as a whole (and most of the individual member states) to the US economy is very small. Therefore, a decline in US imports alone is likely to have a very small impact on the euro area economy.
A slowdown in the US economy could also have an indirect impact on the euro area, through its exports to third countries' trading partners - the so called ‘echo effect' (see for example Dées, S. and I. Vensteekiste (2007), The Transmission of US Cyclical Developments to the Rest of the World, ECB WP 798). Lower import demand from the US has a negative impact on exports of other countries, which may dampen their overall economic activity and hence their imports from the euro area. Empirical literature suggests that the effects of a US slowdown, via indirect trade, are around two times larger than direct trade effects.
The most important indirect channel is through trades with traditional main trading partners, which have a relatively high exposure to the US (for example, the UK). Trades with other regions, which have less trade relations with the euro area, could also be an important channel of transmission of US shocks. In particular, trades with emerging economies, especially Asia, are likely to amplify the direct exposure to the US. Indeed, emerging Asia exports to the US are elevated, amounting to about 20% of the total exports of goods of this region in 2010. In addition, the share of euro area exports to emerging Asia has edged up significantly over the last two decades, amounting to almost 10% in 2010, as opposed to 5% in 2000. In particular, exports to emerging Asia have increased the most in Germany, where its share in total extra-euro area exports of goods jumped to 13% in 2010, from 5% ten years ago. Although the share of exports to emerging Asia has significantly increased over the recent years, the euro area overall direct exposure to this region is low in absolute terms. Belgium and Germany have the highest direct exposure to emerging Asia, with a ratio of exports of goods to GDP of 4% and 2.7%, respectively in 2010.
The strengthening of trade relationships with emerging Asia observed during the recent years is also visible in the dynamics of business cycle linkages. The correlation between emerging Asia with both the US and euro area has increased considerably since 2003. The 5-year rolling correlation is currently at its highest level since mid-1990s with the US and the 1980s with the euro area.
Overall, the fact that the share of emerging Asia in the EMU exports has increased suggests that the euro area economy is probably more sensitive to US economic cycles now than in the previous decade. Yet, the transmission of US shocks to euro area through this indirect trade channel should depend on how emerging Asia's domestic demand reacts to these shocks.
Large Financial Spillover Effects
The strong co-movements observed between the US and euro area business cycles are difficult to explain based on trade linkages alone. A slowdown in the US economy also affects the euro area economy through financial linkages: notably financial flows, exchange rates and asset prices. Overall, the developments in asset prices over the last three decades indicate potential large spillover effects from the US to the euro area, via a synchronisation of costs of capital and wealth effects. Balance sheets of euro area corporates, especially those operating in the US, may ultimately be affected, and hence their investment at home. We believe that these financial channels are an important, if not the largest, potential source of spillover from the US to the euro area in the near term and may eventually exacerbate the international trade effects.
• A US slowdown affects corporate financial flows, notably via US affiliate sales (see Euroletter: Global Exposure Guide 2009, September 21, 2009). Hence, a slowdown in the US economy would weigh on revenues of affiliates of euro area multinational companies in the US, and most likely their activities in their home country. Euro area multinational companies' US affiliates' sales are indeed much larger than traditional trade. For the whole euro area, they amounted to about 9% of GDP in 2008, which is about five times the size of direct trade exposure to the US. In addition, the depreciation in the dollar may also exacerbate the negative impact of a US downturn on revenues of euro area multinational firms operating in the US. Finally, cross-border flows related to merger and acquisition activities could also be affected by a downturn in US activity, though the determinants of these operations are likely to be more structural than just cyclical.
• Developments in the US dollar exchange rate may also amplify the trade effects. For example, a depreciation of the dollar against the euro, with markets anticipating a reduction of the interest rate differential between the US and the euro area, may amplify the initial trade effects by dampening euro area export competitiveness. The depreciation in the effective exchange rate of the dollar may also intensify indirect trade effects. Still, this may depend also on exchange rate policies undertaken by some trading partners that pegged their currencies to the US dollar, notably emerging Asian economies.
Looking back at the recent episodes of US recessions, the real effective exchange rate of the dollar has appreciated during the latest recessions, in 2001 and in 2008. Even going back further, for example during the 1980s, the dollar had tended to appreciate during US recessions. The dollar has depreciated only in 1991 and during the first part of the previous downturn, when the crisis was confined to the US economy, between the end of 2007 and the summer of 2008. This suggests that the effective exchange rate of the dollar depreciated during US recessions, when the US was the epicentre of the shock. In contrast, when the US recessions coincided with global shocks, the dollar tended to appreciate, reflecting presumably flight-to-safety flows, as investors preferred USD-denominated assets in period of high uncertainty. In contrast, on average, the dollar's effective exchange rate depreciated after the US recessions, including this time.
Looking ahead, our FX strategy team is expecting the dollar to appreciate, with a euro-dollar exchange rate reaching 1.36 at the end of 2011, as opposed to 1.43 at the start of August (see FX Shelter from Sovereign Risk Storm, July 29, 2011).
• A US downturn may lead to a decline in asset prices. Stock market cycles are highly synchronised in the US and in the euro area, reflecting their high degree of international financial integration. Historically, the US stock markets have tended to decline before and during US recessions. Stock markets in the euro area fell alongside. What's more, the correlation between equity market cycles in the US and in the euro area has tended to decline before the downturns in activity, but to rise during US recessions. This suggests potential large spillover effects from the US to the euro area, via a synchronisation of wealth effects but also corporate funding costs.
• Corporate bond yields in the US and in the euro area also show high synchronisation since the 1990s. In particular, corporate bond spreads in the US and the euro area are strongly linked. Although, the data on corporate bonds in the euro area do not go back far enough to allow us to draw a clear conclusion, one would expect the deterioration in activity to be likely reflected into the risk premium of corporate bonds. Overall, this suggests potential contagion effects through the costs of capital, which also may amplify the effects of other channels.
• Finally, the interbank money market is a potential channel of transmission of US shock to the euro area, as these markets are intertwined. Indeed, the interbank money markets have contributed to the financial turmoil in the US affecting the rest of the world, including the euro area, during the recent crisis. Yet, this time around, the developments in the repo spreads - the spread between the rates for secured and unsecured lending - suggest that a contagion from the US is less likely. Indeed, the repo spreads have significantly narrowed in the US, while they are currently widening in the euro area. This divergence reflects concerns about the euro area banks' creditworthiness, due to their exposure to sovereign debts.
Spillover Effects from Private Sector Confidence
A US slowdown could also spill over to the euro area through private sector confidence, though this effect is probably difficult to identify independently from the international trade and financial channels. Still, recent developments suggest that spillover effects through corporate confidence are more likely than via consumer sentiment. Moreover, corporate confidence may have an impact on investment plans, which also could worsen the effects from the trade and financial linkages.
• Business confidence in the US and in the euro area has been historically highly correlated. Further, business confidence in the US tends to lead the euro area by about six months on average since the 1990s. The lags have slightly declined over the recent period to about four months. US downturns are generally preceded by a fall in domestic business sentiment and then confidence in the euro area falls a few months subsequently, suggesting a strong link. This delay is also visible in expansion phases, which also confirms the spillover effects. All in all, the spillover effects through business confidence are likely to amplify the effects from the other channels.
• Consumer sentiment surveys in the US and in the euro area seem to be highly correlated as well and coincident, especially since the mid-1990s. Consumer confidence in the euro area has indeed tended to decline almost at the same time as in the US during downturns. This is surprising, as one should expect more delays in the contagion through consumer confidence, as it is likely to be related more to domestic-specific factors. This is substantiated by the fact that consumer confidence in the US tended to be less correlated with the euro after US recessions caused by US-specific shocks (for example in 1991). In particular, during the current recovery, consumer confidence in the euro area recovered earlier than in the US, presumably reflecting the fact that US consumer confidence continues to be dampened by the collapse of the housing market. Overall, despite the high historical correlation, spillover effects via consumer confidence seem less probable than via business confidence.
Conclusion
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