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Weekly Economic Commentary


Infrastructure Spending – What’s Not to Like?

September 30, 2011

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The American Society of Civil Engineers (ASCE) published a study last month pointing out the cost of failure to address the infrastructure needs of the nation. The study concludes that failing to invest in America’s roads, bridges, and transportation system would cost the nation $3.1 trillion in lost GDP, 877,000 in lost jobs, and a significant reduction in productivity by 2020. The graphic below is a summary of the impact of the failure to address the nation’s surface transportation infrastructure.

Chart 1 - 09 30 2011

The obvious question is the about the dollar cost of updating the nation’s transportation system. There is ample good news for taxpayers as the cost of borrowing for the U.S. Treasury is at multi-year lows. The inflation adjusted cost of funds is at 16 bps for 10 years (see Chart 2). Surely there are infrastructure projects that would yield more than 16 bps and enhance the transit system of the nations. President Obama’s American Jobs Act includes provisions for spending $90 billion for infrastructure. The ASCE study estimates that policymakers will need to invest roughly $1.7 trillion in the next ten years to improve the nation’s highways and transit system. The U.S. is on track to spend only close to half of this, implying that there is a big gap between what is needed and what will be accomplished. The infrastructure provisions of the bill provide a much needed avenue to ignite economic growth and create jobs. The main takeaway is that putting tax payer dollars to work in infrastructure repair and development is a win-win proposition at the moment. Will Congress seize the opportunity?

Chart 2 - 09 30 2011

Dollar’s Role as International Reserve Currency: Share Declines, But Still the Largest Player

It is not a surprise the dollar continues to be the preferred official foreign exchange reserve currency but the share shows a gradual decline in the past ten years. The IMF’s Currency Composition of Official Foreign Exchange Reserves for the first and second quarter of 2011 places the greenback’s share at 60.6% of official foreign exchange reserves, down from a high of 71.5% in 2001. The euro’s role has grown from a share of 17.9% in 1999 (when the euro was introduced) to 26.5% in the first two quarters of 2011 (see Chart 3). It is largely a tussle between the dollar and the euro, for now. It is noteworthy that the share of “other currencies” has risen threefold to 4.8% in the first-half of 20o11 vs. 1.6% in 1999. The IMF notes that details of this category are unknown.

Chart 3 - 09 30 2011


Consumer Spending in August Puts Q3 Change at Tepid Mark

Real consumer spending held steady in August inclusive of a 0.1% increase in spending of durable goods and services and a 0.4% drop in purchases of services. Chairman Bernanke’s concern about the decelerating trend of consumer spending is justified. Real consumer spending grew only 1.77% from a year ago and real disposable income also shows a loss of momentum (see Chart 4). The July-August consumer spending numbers point a tepid increase in consumer spending in the third quarter, roughly 1.5%. This is slightly higher than the 0.7% increase in the second quarter but it is not a barnburner by any means.

Chart 4 - 09 30 2011


Nominal personal income fell 0.1% in August after a 0.1% gain in the prior month. Wages and salaries dropped 0.2% in August vs. a 0.3% increase in July. The personal saving rate as a percentage of disposable income edged down to 4.5% in August from 4.7% in July. The saving rate in 2011 is likely to average a touch lower than the 5.3% average recorded in 2010. The Fed’s preferred measures of inflation show a continued upward trend. The personal consumption expenditure price index moved up 2.9% from a year ago in August, while the core personal consumption expenditure price index, which excludes food and energy, rose 1.6%. It is widely expected that these price measures should post a moderating trend in the months ahead.

Chart 5 - 09 30 2011












The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.