Leading indicators still point to recovery

The global economic recovery is likely to continue over the next few months although employment in the United States is continuing to contract.

On Friday, most economists focused their attention on the US employment report. This report was somewhat of a disappointment, with employment reportedly falling 190,000 in October and the unemployment rate rising to 10.2 percent.

Nevertheless, there were some positives in the report. The total number of jobs in August and September were revised up by 91,000. Also, the number of temporary workers rose by 34,000 in October. The latter may be significant because the trend for temporary employment often leads that for overall employment.

However, a better indication of where economies are headed can be obtained from several composite leading indices that were also released on Friday.

The Organisation for Economic Co-operation and Development published its composite leading indicators (CLI) for September on Friday. According to its report, the CLI for the OECD area increased by 1.3 points in September 2009, with recovery "clearly visible" in the United States, Japan and all other OECD economies and major non-OECD economies.

Also out on Friday was the Economic Cycle Research Institute's weekly leading index for the US economy. This rose to 128.8 in the week to 30 October from 128.3 the previous week. The index's growth rate, however, fell to 26.3 percent from 26.9 percent last week, although it remains close to a record high of 27.8 seen in the week to 9 October.

In Japan, the Cabinet Office published its preliminary indexes of business conditions for September on Friday. The index of coincident economic indicators rose 1.3 points in September, its sixth consecutive increase. The index of leading economic indicators rose 3.2 points, its seventh consecutive month of increase.

So although the US economy is continuing to lose jobs, the global economic recovery appears intact for now.

US unemployment rate hits 10.2 percent

US unemployment continued to rise in October. Bloomberg reports:

The unemployment rate in the U.S. jumped to 10.2 percent in October, the highest level since 1983, casting a pall over the prospects for a sustained recovery and risking further erosion of President Barack Obama’s popularity.

Payrolls fell by 190,000 last month, more than forecast by economists, a Labor Department report showed today in Washington. The jobless rate rose from 9.8 percent in September. Factory payrolls dropped by the most in four months, and the average workweek held at a record low...

Today’s report contained some bright spots. Revisions added 91,000 to payroll figures previously reported for September and August, and the number of temporary workers rose by 34,000, the third consecutive gain.

Unemployment also rose in Canada in October. From Bloomberg:

Canadian employers unexpectedly fired workers in October and the unemployment rate rose more than forecast, suggesting the U.S.’s largest trading partner hasn’t fully recovered from the recession that began last year.

Employment fell by 43,200 last month, Statistics Canada said today in Ottawa, and the jobless rate rose to 8.6 percent from September’s 8.4 percent. The median forecast of economists surveyed by Bloomberg was for a 10,000 gain in jobs and an unemployment rate of 8.5 percent.

There was some positive economic data from Europe though. Bloomberg reports that German factory orders rose for a seventh month in September.

Orders, adjusted for seasonal swings and inflation, advanced 0.9 percent from August, when they gained a revised 2.1 percent, the Economy Ministry in Berlin said today. Export orders jumped 3.7 percent in September. Overall orders were still 13.1 percent lower than a year earlier.

ECB, BoE prepare exit from emergency measures, US stocks jump

The ECB is preparing to unwind its emergency programmes. Bloomberg reports:

The European Central Bank took its first step toward removing emergency stimulus measures designed to haul its economy out of recession, saying it won’t offer commercial banks 12-month loans next year.

“Not all our liquidity measures will be needed to the same extent as in the past” as the economy recovers, ECB President Jean-Claude Trichet said at a press conference in Frankfurt today after the bank kept its benchmark interest rate at a record low of 1 percent. Markets don’t expect the ECB to prolong its offer of 12-month money beyond December and Trichet said he would “say nothing to dispel this present sentiment.”

The BoE may be doing the same. From Reuters:

The Bank of England expanded its asset-purchase programme by 25 billion pounds on Thursday, halving the pace at which it buys bonds and suggesting the scheme to revive Britain's recession-hit economy may be coming to an end...

The Bank, which also left interest rates unchanged at a record low of 0.5 percent as expected, said the bond purchases would take three months to complete as it has halved the pace at which the buying would be conducted.

Economic data out of Europe were mixed on Thursday. Retail sales in the euro area fell 0.7 percent in September but UK factory output rose 1.7 percent in September.

US economic data were mostly positive. Bloomberg reports:

Worker productivity surged at the fastest pace in six years, labor costs fell and unemployment claims were lower than forecast, signaling companies may be preparing to start hiring again after cutting costs to the bone.

Productivity, a measure of employee output per hour, jumped at a 9.5 percent annual rate in the third quarter, exceeding the highest economist forecast, according to Labor Department figures released today in Washington. Initial jobless claims dropped by 20,000 to 512,000 in the week ended Oct. 31, the fewest since January...

Labor costs fell at a 5.2 percent rate, capping the biggest 12-month drop since records began in 1948 and exceeding the median forecast for a 4.2 percent decline projected by economists. Costs in the prior quarter fell 6.1 percent, more than previously estimated.

That seemed to be enough to propel stocks up on Thursday. From Bloomberg:

The Dow Jones Industrial Average rose the most since July after U.S. jobless claims and productivity beat economists’ estimates. Gold rallied for a fourth day, while the dollar and Treasuries were little changed...

The Dow increased 203.82 points, or 2.1 percent, to 10,005.96 at 4:01 p.m. in New York for the biggest advance since July 23. The Standard & Poor’s 500 Index rose for a fourth day, adding 20.13 points, or 1.9 percent, to 1,066.63. More than nine stocks gained for each that fell on the New York Stock Exchange.

Fed to keep rates low as services slow

There was not much change in the Fed's stance after the latest FOMC meeting. Bloomberg reports:

The Federal Reserve repeated it will keep interest rates near zero for “an extended period” and specified for the first time that policy will stay unchanged as long as inflation expectations are stable and unemployment fails to decline.

“Businesses are still cutting back on fixed investment and staffing, though at a slower pace,” the Federal Open Market Committee said in a statement today. “Household spending appears to be expanding, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth and tight credit,” the FOMC said after meeting in Washington...

Officials kept their benchmark overnight lending rate at between zero and 0.25 percent, where it has been since December. The conditions they cited to keep it there are “low rates of resource utilization, subdued inflation trends, and stable inflation expectations.”

Economic data somewhat justified the cautious Fed stance. From Bloomberg:

Service industries in the U.S. expanded more slowly than forecast in October, indicating that consumers spooked by mounting job losses are making a limited contribution to the recovery entering the fourth quarter.

The Institute for Supply Management’s index of non- manufacturing businesses which make up the largest part of the economy fell to 50.6 in October from 50.9 in September, according to the Tempe, Arizona-based group...

A separate report from ADP Employer Services today signaled unemployment will keep climbing. Companies cut an estimated 203,000 jobs in October. The figures, which don’t include hiring by government agencies, were forecast to show a decline of 198,000 jobs, according to the median estimate of 34 economists in a Bloomberg survey.

European service sectors provided a somewhat brighter picture. The eurozone service sector PMI rose to 53.0 in October from 51.1 in September while the UK service sector PMI rose to 56.9 from 55.3.

RBA hikes again

The Reserve Bank of Australia raised its official interest rate again on Tuesday, as most economists expected. Bloomberg reports:

Australia raised its benchmark interest rate by a quarter percentage point for the second straight month, becoming the only nation to increase borrowing costs twice this year as the global economy recovers.

Reserve Bank Governor Glenn Stevens lifted the overnight cash rate target to 3.5 percent in Sydney today, as forecast by 18 of 22 economists surveyed by Bloomberg News. The rest expected a half-point move.

Australia’s dollar and bond yields fell as traders reduced bets on an increase in December after Stevens said higher rates would come “gradually.” Rising consumer confidence and Chinese demand for iron ore and coal will stoke economic growth while the currency’s 29 percent gain this year may hurt exporters and curb inflation, he said.

Today's economic reports from Australia tempered expectations of further rate hikes. The Age reports:

Retail sales fell by a surprising 0.2 per cent in September, reducing the chances of another rise next month in official interest rates. Building approvals, though, came in slightly higher than forecast.

The seasonally adjusted drop followed a revised 0.7 per cent increase in August, official data out today show. Analysts had expected a 0.5 per cent increase.

Probably more important for the global economy and investors, though, is the monetary policy decision by the Federal Reserve later today. Despite additional signs of economic recovery in the US on Tuesday in the form of a 0.9 percent rise in factory orders in September, the Fed is expected to keep interest rates unchanged.

Global manufacturing PMI hits 39-month high

The global economic picture brightened considerably on Monday, the US leading the way. From Bloomberg:

Manufacturing in the U.S. expanded faster than anticipated in October, easing concern the economic recovery will be cut short once government aid wanes.

The Institute for Supply Management’s factory index rose to 55.7, a three-year high and exceeding every estimate of the 70 economists surveyed by Bloomberg News, data from the Tempe, Arizona-based group showed today...

The number of contracts to buy previously owned homes unexpectedly rose in September for an eighth straight month as Americans rushed to meet a deadline for a home-buyer tax credit, a report from the National Association of Realtors also showed today. The group’s pending home sales index rose 6.1 percent after a 6.4 percent gain in August, and were up 20 percent from the same time last year.

Figures from the Commerce Department showed spending on all construction unexpectedly rose 0.8 percent in September, the biggest gain in a year, driven by the largest increase in homebuilding since 2003.

Meanwhile, eurozone manufacturing has moved into expansion for the first time in 17 months. Bloomberg reports:

An index of manufacturing in the 16-nation euro area rose to 50.7 from 49.3 in September, London-based Markit Economics said today, confirming an Oct. 23 estimate for the gauge, which is based on a survey of purchasing managers. The last time the index was above 50, indicating expansion, was in May 2008.

UK manufacturing appears to be recovering even more sharply. From Reuters:

Manufacturing activity grew at its fastest rate in two years in October as new orders rose at their fastest in almost 6 years and firms started rebuilding their stocks, a survey showed on Monday. The CIPS/Markit purchasing managers index of manufacturing activity rose to 53.7 in October from an upwardly revised 49.9 in September, signalling the fastest pace of growth since November 2007 and beating forecasts for a rise to 50.0.

Meanwhile, manufacturing activity in China accelerated in October. AFP/CNA reports:

China's manufacturing activity continued to expand in October, as domestic and overseas demand strengthened and employment picked up, an independent survey published on Monday showed.

The HSBC China Manufacturing PMI (Purchasing Managers Index) rose to an 18-month high of 55.4 in October from 55.0 in September...

A separate official PMI compiled by the National Bureau of Statistics showed manufacturing activity rose to 55.2 in October - the highest since May 2008 - from 54.3 in September.

Data last week, however, showed a slight deceleration in manufacturing activity in Japan, the Nomura/JMMA Japan Manufacturing Purchasing Managers Index falling to 54.3 in October from 54.5 in September.

That did not stop the global manufacturing PMI from hitting 54.4 last month, the highest level in 39 months, and up from 53.0 in September.

Most big economies grew in third quarter

Most of the major industrialised economies expanded in the third quarter.

The United Kingdom's is not one of them. On 23 October, the UK reported that its gross domestic product shrank 0.4 percent in the third quarter. This was much worse than economists' expectation of a 0.2 percent increase.

Last week's data, however, show that most of the other major industrialised economies grew in the third quarter.

In contrast to the UK, on 29 October, the United States provided a positive surprise for the third quarter, reporting a 0.9 percent increase, or 3.5 percent annualised. Economists had expected a growth rate of 3.2 percent. In the second quarter, the economy had contracted at an annualised rate of 0.7 percent. The economy's return to growth in the third quarter was marked by higher consumer spending, a slowdown in the reduction of inventories and an increase in residential investment.

It is likely that the euro area will also return to positive economic growth in the third quarter. The eurozone economy shrank by just 0.2 percent in the second quarter and economic indicators suggest that the economy has improved since then. For example, the European Commission's economic sentiment indicator has been rising steadily since hitting bottom in March this year and a report published on 29 October showed that it hit 86.2 in October, up from 82.8 in September.

Japan's economy returned to growth in the second quarter, increasing by 0.6 percent compared with the previous quarter, and the expansion is very likely to have continued in the third quarter. Data released on 29 October showed that industrial production increased by 1.4 percent in September, the seventh consecutive month of increase. Industrial production was 10.8 percent higher in the third quarter than the previous quarter.

While the major industrialised economies are making a gradual return to growth, some other economies have resumed growing at a blistering pace. For example, China had reported on 22 October that its economy grew 8.9 percent in the third quarter from the previous year. On 26 October, South Korea reported that its economy grew 2.9 percent in the third quarter from the previous quarter.

Fiscal stimulus is generally considered to have played an important part in the global economic improvement and there remain questions about how much growth can be sustained in the coming quarters.

Nevertheless, the return of most of the major industrialised nations to economic growth marks a good start to global economic recovery.

US stocks fall, BoJ phasing out emergency measures

US markets closed sharply down on Friday, the S&P 500 falling 2.8 percent to 1,036.19, more than erasing Thursday's 2.3 percent jump. For the whole of October, the S&P 500 fell 2 percent, its first monthly decline since February.

The day had started positively for investors, with Asian markets closing higher for the day. The Nikkei 225 rose 1.5 percent.

Positive news on the Japanese economy helped boost markets early in the day. From AFP/CNA:

Japan's economy on Friday showed fresh signs that it is recovering after a sharp downturn, with jobless figures hitting a four-month low, an easing in deflation and household spending edging up.

Japan's unemployment rate fell to a four-month low of 5.3 percent in September, beating the market expectation that it would rise to 5.6 percent, according to data from the internal affairs ministry.

The latest figure was down from 5.5 percent in August and the lowest since 5.2 percent in May...

Core prices, which exclude those of volatile fresh food, dropped 2.3 percent in the month from a year earlier, after an unprecedented 2.4 percent slump in August.

Compared with the previous month, prices rose 0.1 percent -- the first increase in six months...

In September Japanese household spending edged up by 1.0 percent from a year earlier, an increase for a second consecutive month.

Unfortunately for investors, the Bank of Japan has noticed the improvement in the economy. From Bloomberg:

The Bank of Japan said it will stop buying corporate debt at the end of the year, as central banks around the world phase out emergency measures taken at the height of the financial crisis.

Governor Masaaki Shirakawa and his colleagues also said they will only extend a program providing unlimited collateral- backed loans to banks one last time through March 31...

The bank also left its benchmark interest rate at 0.1 percent and pledged to keep borrowing costs at “low levels” as it forecast deflation will extend into fiscal 2011. Shirakawa said he’s “committed to prolonging the current extremely accommodative financial environment.”

Central bank tightening could threaten markets, especially if the economic recovery turns out to be weak. Unfortunately, data later in the day hinted at the latter.

German retail sales unexpectedly fell 0.5 percent in August while in the euro area as a whole, consumer prices fell for a fifth month in October after the unemployment rate increased to 9.7 percent in September, the highest in more than a decade.

Across the Atlantic, Canada produced a negative surprise on the GDP front. Bloomberg reports:

Canada’s economy unexpectedly shrank in August, suggesting it may not have followed the U.S. out of a recession in the third quarter as the central bank and a majority of economists predict.

Gross domestic product fell 0.1 percent in the month, as oil and gas extraction dropped 2.3 percent and manufacturing fell 0.7 percent, Statistics Canada said today from Ottawa. Economists expected a 0.1 percent increase after output was little changed in July, according to the median estimate of 23 analysts surveyed by Bloomberg.

And the US economy may not be all that healthy despite Thursday's positive GDP report. Again from Bloomberg:

Americans cut spending for the first time in five months and a gauge of confidence weakened, signaling consumers will make a limited contribution to the recovery without government incentives.

Consumer spending fell 0.5 percent in September after a 1.4 percent jump in August, Commerce Department figures showed today in Washington. The Reuters/University of Michigan final index of consumer sentiment decreased to 70.6 in October from 73.5 the month before.

The US did provide a positive piece of data.

The Institute for Supply Management-Chicago Inc. said its business barometer increased to 54.2, the highest level in 13 months. The gauge was forecast to rise to 49, the median estimate of 58 economists in a Bloomberg News survey. Readings above 50 signal an expansion.

US economy returns to growth

Plenty of positive economic reports on Thursday.

In the US, the economy returned to growth in the third quarter. Bloomberg reports:

The U.S. economy returned to growth in the third quarter after a yearlong contraction as government incentives spurred consumers to spend more on homes and cars.

The world’s largest economy expanded at a 3.5 percent pace from July through September, figures from the Commerce Department showed today in Washington. Household purchases climbed 3.4 percent, the most in two years.

The reports out of Europe were also positive. From Bloomberg:

European factories increased capacity usage on assembly lines for the first time in two years this quarter as confidence in the economic outlook rose to the highest since Lehman Brothers Holdings Inc. collapsed.

Assembly-line activity in the euro area rose to 70.7 percent of capacity this quarter from 69.6 percent in the prior three months, the European Commission in Brussels said today. An index of executive and consumer sentiment jumped to 86.2, the highest since September 2008, when Lehman filed the biggest bankruptcy in U.S. history, compounding the financial crisis.

And Japanese industrial production rose again in September. AFP/CNA reports:

Japan's factory output rose for a seventh straight month in September, data showed Thursday – the latest sign the world's second largest economy is slowly recovering from a deep recession.

Industrial production increased 1.4 per cent in September from August, extending its longest unbroken expansion in 12 years, as car makers boosted their output in response to recovering demand, the government said.

Norway raises interest rate

This was widely expected. From Bloomberg on Wednesday:

Norges Bank raised its key interest rate a quarter point from a record low and signaled steeper increases than it previously forecast over the next three years as inflation accelerates and unemployment remains low.

The Oslo-based bank raised the overnight deposit rate to 1.5 percent, becoming the first European central bank to reverse its easing cycle since the credit crisis started to abate. Nineteen of 20 economists surveyed by Bloomberg had predicted the move, while one had expected a half-point increase.

Don't expect the Fed to follow with a rate hike of its own soon though. Wednesday's US economic data show that the sustainability of the recovery remains a question. From Reuters:

Sales of new U.S. homes unexpectedly tumbled in September, their first drop in six months, underscoring the hazards to an economic recovery even as businesses appeared to be stepping up investment.

New single-family home sales fell 3.6 percent to a 402,000 unit annual pace from a downwardly revised 417,000 units in August, the Commerce Department said on Wednesday. Analysts polled by Reuters had expected sales to rise to a 440,000 unit pace...

The housing data represented a road bump in a recovery that otherwise appears to be widening. Another Commerce Department report showed that new orders for long-lasting U.S. manufactured goods rose 1 percent in September as businesses stepped-up investment plans...

The report showed orders for nondefense capital goods excluding aircraft, a closely watched proxy for investment spending, rose a solid 2 percent in September, suggesting businesses were growing increasingly confident the economy's recovery would be sustained.