Tuesday, 31 May 2005

Uneven recovery in industrial production as trade wars loom

If the soft patch is over, the data from Asia yesterday were inconclusive.

In South Korea, industrial output fell a seasonally-adjusted 1.7 percent in April compared with a revised 3.9 percent rise in March. Domestic demand was also weak, with wholesale and retail sales and corporate investment all falling.

In contrast, Japan's industrial output rose 2.2 percent in April from March, reversing a revised 0.2 percent fall in March. However, manufacturers projected output in May to fall 2.3 percent before increasing again by 1.4 percent in June.

There was more good news from Japan today. Its unemployment rate fell to 4.4 percent in April from 4.5 percent in March while spending by Japanese wage earner households rose 3.6 percent in April from a month earlier.

Meanwhile, the potential for trade wars loom in the background -- over aircraft subsidies and textiles. And the following statement in this earlier report on the textile dispute appears quite accurate: "When it comes to trade and textiles, China is not afraid of playing hard ball."

Saturday, 28 May 2005

Potential US trade protection and possible Chinese responses

Brad Setser has a post on "Bretton Woods Two and Trade Politics". His main point:

[I]t is not surprising that the unprecedented US savings deficit and Chinese consumption deficit (and resulting US current account deficit that is now heading towards 7% of GDP and Chinese current account surplus that looks likely to exceed 7% of China's 2005 GDP) is putting real strains on the trading system. Deficits and surpluses of this scale in major parts of the world economy challenge the norms of the post-war system -- and challenge domestic political compromises that enabled post-war trade liberalization. Even if deficits and surpluses of this size are economically sustainable, they may not be politically sustainable.

Politically sustainable or not, Andy Xie thinks that the sky isn't falling on globalisation, so China should not accomodate US protectionist pressure.

[I]f the purpose of US pressure on China is just to damage China, it is pointless for China to compromise. China is better off to wait for a protectionist bill, such as a 27.5% tariff, which may affect only the one-fifth of China's exports to the US that belong Chinese companies, or 5-6% of China's total exports. The US and other foreign companies own four-fifths of China's exports to the US and must pay the tariffs. This would be better than a big revaluation that would affect all of China's exports and may destabilize the economy.

Xie, of course, is assuming that a revaluation is not in China's interests, an assumption not everyone would agree with.

The Northern Trust Company's Paul Kasriel and Asha Bangalore for one -- or two -- assert that anchoring the renminbi to the US dollar is a recipe for Chinese inflation. They suggest instead that the Chinese anchor their currency to gold as "a recipe for long-run price stability. And long-run price stability may be an important ingredient in the recipe for social stability, something the Chinese leadership is striving to preserve."

Consumers continue spending in April

The Commerce Department reported yesterday that US personal income increased 0.7 percent in April while consumer spending rose 0.6 percent. General Glut, though, was not impressed.

More importantly, real disposable personal income...was up a much more humble 0.1%...real consumption growth in April was 0.2%. Thus, Americans continue to increase their consumption faster than they are increasing their disposable income.

Some moderation in the rate of consumer spending is likely. The University of Michigan's measure of consumer sentiment fell to 86.9 in May from 87.7 in April. The final reading for May was higher than the preliminary reading of 85.3 reported two weeks ago.

In Japan, however, there is more evidence that consumer spending is picking up. According to the Ministry of Economy, Trade and Industry, Japan's retail sales rose 3.9 percent in April from a year earlier, the sharpest rise in eight years.

Japan's deflation also continued to moderate. Although core consumer prices in Japan edged down 0.2 percent in April from a year earlier, month on month, the core consumer price index rose 0.3 percent, the second consecutive month it has increased, while core consumer prices in Tokyo, a leading indicator of nationwide inflation, rose 0.2 percent in May from April.

Friday, 27 May 2005

Economic data show upward bias, but excesses may be reversing

US real gross domestic product for the first quarter has been revised up to 3.5 percent.

In other US economic news, the Labor Department reported that initial unemployment insurance claims rose by 1,000 to 323,000 last week. The 4-week moving average rose by 500 to 330,500 from the previous week's revised average.

Meanwhile, there is possibly some more evidence that the soft patch in the global economy may be ending. Singapore's manufacturing output grew 13.4 percent on a seasonally-adjusted month-on-month basis, reversing falls in the previous three months.

Then again, maybe not.

Days of fast profits in China's property market could be over: analysts
Falling retail property prices in the country's commercial capital Shanghai mean fast and easy profits in China's red hot real estate market could be a thing of the past, analysts say.

Recent government-directed cooling measures have hit investors where it hurts most, with tumbling prices denting real estate revenues and possibly bankrupting smaller property developers in the months ahead.

Property transactions between late April and early May dropped sharply here in Shanghai, with residential sales alone down to 3.13 billion yuan (378 million dollars) from 7.75 billion the month before, official statistics show.

And if the following Associated Press article -- "'Aha!' moments hit future retirees" -- is any indication, a cooling of China's property market may be occurring at about the same time as Americans start raising their savings rates.

These may be indications that global economic excesses have begun to reverse.

Thursday, 26 May 2005

Monetary policies amid diverging outlooks

Yesterday, General Glut, commenting on the OECD's recommendation that the United States tighten monetary policy but that Japan, Europe and Korea should not, says:

Does anybody else see the problem in this list of recommendations? First and foremost, it assumes a world of national economies... Events have demonstrated that the Federal Reserve not only has no control over long-term US interest rates...but precious little control over key short-term interest rates as well.

It is an interesting point. It is consistent with the point I made yesterday that some economic relationships have changed.

And yet, the conclusion that the Federal Reserve has no control over long-term interest rates could be premature because it has not raised the Federal funds rate significantly above the inflation rate yet.

Also yesterday, The Prudent Investor recommends watching M3 rather than the inflation rate to get "a better idea how much money is actually sloshing around in relation to the goods and services produced".

In yesterday's economic news, the Ifo index on German business confidence fell for a fourth straight month to 92.9, the lowest since August 2003, from 93.3 in April. In the US, the Commerce Department reported that durable goods orders rose 1.9 percent in April -- but fell 0.2 percent excluding transportation -- with orders for non-defense capital goods rising 3.8 percent, while sales of new homes rose 0.2 percent in April and the median price of a new home jumped 6.1 percent.

Wednesday, 25 May 2005

Divergences in the global economy

Reuters reports that according to the National Association of Realtors, sales of existing US homes surged 4.5 percent to a record high in April and median home prices rose 15.1 percent, the biggest annual gain in almost 25 years. This is a hot pace, and no wonder that National Association of Realtors Chief Economist David Lereah was quoted by Reuters as saying yesterday: "Prices are now becoming a concern. There's a speculative element in home buying now."

It all looks in such sharp contrast to what is happening in Germany.

German investor confidence falls
German investor confidence plunged to its lowest point in six months in May, according to economic think tank ZEW. The organisation said confidence had dropped from 20.1 points in April to 13.9 points in its May survey of 298 analysts and institutional investors.

Separately, the OECD lowered its growth forecasts for Germany...

The Prudent Investor posted an interesting chart yesterday that shows that, over the last 30 years, oil prices and the Fed funds rate tended to move together. Over the last few years, however, the two have diverged. A sure indication that economic relationships have changed recently, and that the inflation problem we face today is not the same inflation problem we faced in the 1970s.

Tuesday, 24 May 2005

Inflation? Not here

Singapore's consumer price index rose 0.4 percent in April on a seasonally-adjusted basis. That looks large, until you notice that it also rose 0.4 percent from a year ago.

The news on Singapore's inflation rate seems consistent with the news that Singapore's yield curve is the flattest since 1998 at the height of the Asian financial crisis, with the yield on 10-year Singapore Government Securities at only 2.74 percent.

Hong Kong's inflation is also tame. Its consumer price index rose just 0.5 percent in April from a year earlier, slower than the 0.8 percent rise in the previous month.

In other Hong Kong news, the volume of its domestic exports fell 19.2 percent in March over the same month last year. Prices rose by 5 percent. The volume of goods imports fell 1.1 percent while prices rose 3.9 percent. On the whole, it doesn't look very encouraging for Hong Kong.

But the interesting thing to me is that when the two city-states that are among the most exposed to international economic forces see hardly any inflation despite the rise in oil prices, does that tell you something about global economic conditions?

Optimism on US economy, less so for Europe and Asia

Economists surveyed by the National Association for Business Economics (NABE) appear relatively optimistic about the economic outlook for the US.

"After a mild slip during the early spring, our panel expects the expansion to regain its footing," said Carl Tannenbaum, Chair of the NABE Outlook Survey committee and Chief Economist at LaSalle Bank in Chicago. Tannenbaum added, "The NABE panel also sees higher inflation that will prompt more restraint from the Federal Reserve, which is expected to raise the funds rate to 4% by early next year."

But Japan again seems to be flattering to deceive.

Japan's services industry shrank more than expected in March as shoppers spent less at department stores, raising concern that a revival in consumer spending in the world's second-largest economy may falter. The tertiary index, a gauge of demand for services, fell 1 percent from a month earlier, seasonally adjusted, the Ministry of Economy, Trade and Industry said today in Tokyo.

And outlook for the German economy is also not very good.

The Conference Board announced today that the leading index for Germany decreased 0.4 percent...in March...the leading index now stands at 102.6. Based on revised data, this index declined 0.1 percent in February and was unchanged in January. During the six-month span through March, the leading index declined 0.8 percent, with four of the eight components increasing.

Morgan Stanley thinks that China is headed for a slowdown too. Andy Xie wrote:

China's investment cycle is likely to turn down soon. The leading indicators for investment-corporate profits and property prices are already turning down. The current data are still very strong because the projects that began or were planned last year will have to continue on account of the large costs that have been sunk in. Weakening business profits and property prices should slow investment planning this year and physical investment in 2006. The lack-of-growth situation is likely to get worse regardless of when the Fed decides to stop raising interest rates.

And Stephen Roach thinks a China slowdown would impact other Asian economies badly:

Chinese import growth has become an engine of pan-Asian exports over the past six years... Reflecting this increasingly tight linkage, the recent slowdown in Chinese import growth is already having important ripple effects elsewhere in Asia... All in all, a slowing of Chinese export growth could have a major impact on both Chinese and pan-Asian GDP growth over the course of 2005.

Which, bearing in mind the ongoing hikes in interest rates by the Federal Reserve, raises the question of whether a revaluation of the renminbi later this year would come a little too late in the cycle to be constructive.

Monday, 23 May 2005

Inflation: Past the peak?

The macroblog focuses on inflation yesterday -- specifically, inflation modeling. This is topical, what with analysts having some trouble of late determining exactly where it is headed.

Michael Englund, chief economist at Action Economics, wrote in Business Week:

In total, we suspect that we have now seen the peak in near-term inflation pressures in the U.S. economy, and the markets should prepare to enjoy some encouraging inflation reports over the coming months. The bond market has recently gained strength on "soft patch" talk as well as concerns over hedge-fund solvency. But the better reason for recent bond price strength may derive from the passage of the worst of the inflation news for the year.

Of course, analysts can be as fickle as the data they rely on. That is essentially the point of my latest commentary, "Economic indicators and stock markets change their minds".

Sunday, 22 May 2005

Weekend reading: Real estate, trade and currencies

Here are some interesting reads from blogs yesterday.

Barry Ritholtz has lots on real estate at The Big Picture. Start here. Just don't blame me if you ruin the rest of your weekend because you end up spending it in front of the computer.

But if you're more concerned with trade and currencies, hop over to Brad Setser's Web Log as he discusses some recent trade and currency trends. And for those who don't think exchange rates matter, he had this to say:

Europe's exports to the US have grown 28.5% between 2000 and 2004 -- even with the euro's rise since 02. Nothing compared to China, whose exports to the US increased by 97% between 2000 and 2004. But European exports to the US still grew faster than overall Asian Pacific exports to the US -- which were up only 18% over the same period.

Part of that is the lagged impact of the weak euro, which lasted til mid 2002. US imports from the Asian-Pacific region are currently growing twice as fast as imports from the eurozone. (15.6% v 8.4% --yes, exchange rates do matter ... )

And in the comments section, PC of Investor's Diary left this comment:

People talk about a Dollar crisis but the real economic crisis will come when the Dollar becomes relentlessly strong.

And on his own blog, he wrote:

How about this scenario - a long and deep secular economic contraction finally starts to reverse the US trade deficit. Dollar demand is high due to all the outstanding Dollar denominated debt obligations that needs to be repaid. So the Dollar continues to strengthen relentlessly due to a collapsing current account deficit plus strong demand for the greenback.

In other words, a deflationary scenario. Perhaps then, we would be nostalgic for inflation.

Saturday, 21 May 2005

More economic indicators

Global Insight sees a brighter outlook for IT spending.

The Wendover-Global Insight IT Spending Index for April 2005 projects sustained spending levels in IT equipment and software. April's survey reflected a healthy bounce back from Q1 responses. Moreover, the growth in spending appears to be relatively stable, albeit lower than peak recovery levels. IT manufacturers are likely to see good sales for the balance of 2005.

Calculated Risk also points to surging traffic in April for both the Port of Los Angeles and Port of Long Beach.

On the other hand, the Baltic Dry Index (BDI) is on a clear downtrend. Then again, the BDI does sometimes turn on a dime.

Friday, 20 May 2005

Global economy cool, except in China

The Conference Board announced yesterday that the US leading index decreased 0.2 percent to 114.5 in April, the fourth consecutive month of decline after February's small increase was revised down to a small decrease.

"The recent weakness of the leading index is consistent with the economy continuing to expand in the near term, but at a slower pace," the Conference Board said.

Barry Ritholtz at The Big Picture points to Michael Panzer who reveals other signs that the US economy is slowing, namely the Empire (New York) Federal Reserve Survey, which came in at -11.1, and the Philadelphia Fed Factory Index, which fell to 7.3.

Yet another ominous sign: Calculated Risk highlights the fact that real estate is on the front cover of Fortune. The end for real estate may be near, and that bodes ill for the rest of the economy.

And for potential financial shocks, watch out for the hedge funds and GSEs.

Meanwhile, the eurozone's inflation is showing a pattern similar to that of the US. While the overall inflation rate was 2.1 percent in April, core prices rose at an annual rate of just 1.4 percent, according to Eurostat.

However, in China, things look a little less cool, at least as far as investment is concerned.

Fast China investment shows tough rebalancing task
China's efforts to slow down investment growth are faltering, official figures released on Thursday showed, underlining the battle facing the authorities to prevent the world's seventh-largest economy from overheating.

Urban fixed-asset investment, which includes everything from property to power plants, was 26.5 percent higher in April than a year earlier, a little faster than the 25 percent that economists had expected and maintaining a trend of similarly rapid growth seen since last year.


Investment in property in the first four months of the year was 25.9 percent higher than in the same period of 2004, compared with a 26.7 percent increase in the first quarter.

Which again reminds me of Andy Xie's words: "The party doesn't end until property prices fall". So there may still be life left in the economic expansion.

Having said that, though, the Chinese government did recently take fresh measures to cool the investment boom. And if the Chinese renminbi is revalued soon as many believe -- and despite the acknowledgement by the US Government Accountability Office that some groups could be "negatively affected" and that financial markets could face "short-run disruptions" -- the effects of the recent move by Hong Kong to loosen its own currency peg possibly provides a small foretaste of what is to come.

Thursday, 19 May 2005

US CPI rises but core unchanged

The US Labor Department reported yesterday that the consumer price index (CPI) rose 0.5 percent in April. Core CPI, however -- excluding food and energy -- was unchanged. The macroblog has more details, including the following comment: "That zero in the ex food and energy column was a bit of a surprise, but in the end it reflected, in part, a reversal of some strangeness in March."

In his latest investment outlook, Bill Gross of PIMCO gives his take on the inflation outlook:

[I]n combination with a globalized free trade-based economy exhibiting a surfeit of cheap Asian labor, it will be difficult to generate U.S. inflation higher than our current 3% even if interest rates fall further. If 3% inflation is all we can get from the past 5-years’ asset inflation, it’s hard to believe that we get more from what’s left. The potential to reflate via interest rates is nearly over... Continued disinflation not reflation, then, will rule our fragile future kingdom, with the potential for 1-2% CPI prints in most years between 2006 and 2010 throughout much of the global economy.

Gross is possibly an optimist. Bill Cara is contemplating deflation. In a recent post, he says that "deflation vs inflation is probably the likeliest event longer-term (say a year out)".

If the CPI does threaten to deflate, though, US politicians can always try to force it up by bashing China over currency and textiles. Otherwise, China's industrial juggernaut will continue to expand, like it did in April, when industrial output rose 16 percent from a year ago, accelerating from March's 15.1 percent rise.

Brad Setser has more on the latest round of China-bashing.

Wednesday, 18 May 2005

Mixed economic news

The economic news around the world remains mixed, not least those from the US yesterday.

Inflation concerns were maintained after the Labor Department reported yesterday that the US producer price index increased 0.6 percent in April. This followed a 0.7-percent rise in March and a 0.4-percent gain in February. Excluding food and energy prices, the producer price index for finished goods increased 0.3 percent in April.

Any increase in demand, however, did not show up in the Federal Reserve's release yesterday on industrial production, which fell 0.2 percent in April after an increase of 0.1 percent in March. Output from manufacturing and mining were flat while output from utilities dropped 2.3 percent. Overall capacity utilization fell 0.2 percentage point to 79.2 percent, which is 1.8 percentage points below the 1972-2004 average.

Providing hope for future demand and production is yesterday's Commerce Department report showing that US housing starts surged 11.0 percent in April, reversing a 14.9 percent fall in March.

In earlier news out of Asia (and not previously reported), Japan's industrial output in March fell a revised 0.2 percent from February, better than the initially estimated decline of 0.3 percent, China's retail sales rose 12.2 per cent in April, below the 13.9 per cent rise in March, Singapore's retail sales rose 10.7 percent in March over February while its non-oil domestic exports rose 4.6 per cent in April, reversing the 6.7 per cent fall in March.

In the UK, inflation is holding steady as the consumer price index rose 1.9 per cent in the 12 months to April, the same as in March, and British house prices rose a modest 0.3 percent between mid-April and mid-May, down from 1.3 percent between mid-March and mid-April.

The concern over rising consumer price inflation and falling asset price inflation in the UK and almost everywhere else is just another aspect of the conundrum in the global economy.

Tuesday, 17 May 2005

Capital flows into US fall short of deficit, Japan turns to domestic demand

Brad Setser discusses capital flows into the US.

Strange trade numbers, strange TIC numbers
The trade deficit fell in March. So did the capital flows needed to sustain ongoing trade deficits. Net inflows of $45.7 billion a month are not enough to sustain even $55 billion monthly trade deficits, let alone $60 billion monthly deficits. I guess there was a reason why the euro was sort of strong in mid-March...

As long as the renminbi remains pegged to the US dollar, China at least will continue to be a source of capital.

The yen, though, may resume its strength against the US dollar after the Japanese government reported today that Japan's economy grew 1.3 percent in the January-March quarter, the fastest pace in a year. Strong domestic consumption and capital spending more than made up for slackening export growth. Private-sector consumption rose 1.2 percent while capital spending rose 2.0 percent in the quarter.

Improving employment and moderating deflation mean that Japan may yet be able to sustain economic growth through domestic demand despite weakening exports. Things appear less rosy elsewhere in Asia.

Singapore's Ministry of Trade and Industry today reported that the Singapore economy shrank by an annualised 5.5 percent in the first three months of this year, slightly smaller than the advance estimate of a 5.8 percent fall. The poor performance was due to weakness in manufacturing, which grew by 3.1 percent year-on-year in the first quarter, decelerating from 14.1 percent in the fourth quarter of 2004.

Meanwhile, South Korea's National Statistical Office reported today that the country's seasonally adjusted unemployment rate rose to 3.6 per cent in April, matching the highest rate since August 2004, and up from 3.5 per cent the previous month.

Japan's performance in the first quarter of 2005, however, will no doubt give countries like Singapore and South Korea some hope.

Monday, 16 May 2005

China's inflation rate falls, Japan's current account surplus edges up

China and Japan seem to be coping quite well with their large foreign exchange reserves.

Those who worry that China's currency peg amid high economic growth rates may be causing inflation have less reason to worry now. The National Bureau of Statistics reported today that China's consumer inflation rate for April was 1.8 percent year-on-year. It is the lowest figure so far this year and compares with a 2.7 percent rise in March.

Meanwhile, Japan is becoming more reliant on its investment income to sustain its current account surplus growth. Despite an 8.5 percent fall in its trade surplus, Japan's current account surplus in March rose 0.5 percent from a year earlier, according to the Finance Ministry. This was its first gain in three months and was mainly due to a gain in income from investments in foreign bonds and stocks. Exports were up 6.5 percent from a year earlier while imports jumped 11.8 percent due to soaring oil prices.

The analysts quoted by AFP do not seem too optimistic about the outlook for Japan's exports. Daiwa Institute of Research senior economist Junichi Makino said that "Japan's exports are most likely to stagnate at least" for a while. UFJ Institute senior economist Tomomichi Akuta said: "In the face of slow demand in Asia and a slump in the European market, Japanese exports will likely remain flat in the months to come."

Saturday, 14 May 2005

Main pillars of economic growth under threat

Reuters reports that the University of Michigan's measure of consumer sentiment in the US slipped to 85.3 in early May from 87.7 in April, business inventories rose 0.4 percent in March, while import and export prices rose 0.8 percent and 0.6 percent respectively in April after rising 2.0 percent and 0.6 percent respectively in March.

Price pressures are also strong in China. Producer prices rose 5.8 percent from a year earlier after climbing 5.6 percent in March, the Beijing-based National Bureau of Statistics said on its Web site. Crude oil and coal prices surged 37 percent and 26 percent respectively.

Inflation in China is being sustained by continuing strong growth in money supply. China reported that M2 rose 14.1 percent from a year earlier in April. This compares with a rise of 14 percent in March. M1rose 10 percent year-on-year in April compared with 9.9 percent in March.

The Chinese government appears comfortable with this rate of monetary expansion. At least comfortable enough not to contemplate a revaluation of the renminbi any time soon. "Media reports on the expected appreciation of the Chinese currency, renminbi, on May 18 are not correct," said central bank governor Zhou Xiaochuan.

Michael Shedlock seems to agree that a revaluation is not imminent, citing "a collapsing stock market, a certified property bubble, insolvent banks, and hot money pouring hoping to make a quick score" as well as the impending shut-down of "more than 2,000 debt-ridden State-owned enterprises [resulting in] 3.66 million employees needing reallocation".

Not to mention the global economic slowdown. China's trade surplus in April fell -- to US$4.59 billion from US$5.7 billion in March. And China's rich neighbour doesn't seem too optimistic about the economic outlook.

Japan's Cabinet Office reported that core private sector machinery orders, which exclude volatile orders from electric utilities and for ships, rose 1.9 percent in March, well above expectations for a fall of 0.9 percent drop. However, orders are expected to fall 3.1 percent in the second quarter.

So this appears to be a continuation of the story of weak business investment. US consumption -- despite rising indebtedness -- and Chinese investment -- much of which appears to be speculative -- remain the main pillars of global economic growth. And if US consumer sentiment continues to deteriorate and Chinese measures to cool investment (reported yesterday) prove overly effective, that can only mean one thing for the global economy.

Friday, 13 May 2005

US retail sales rise in April amid gloomier outlooks in Europe and Asia

Calculated Risk looks at the US Census Bureau's April report on retail sales:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for April, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $344.9 billion, an increase of 1.4 percent (±0.7%) from the previous month and up 8.6 percent (±0.8%) from April 2004. Total sales for the February through April 2005 period were up 7.5 percent (±0.5%) from the same period a year ago. The February to March 2005 percent change was revised from +0.3 percent (±0.7%)* to +0.4 percent (±0.3%).

...and Wal-Mart's first quarter report:

Wal-Mart Stores Inc. reported a 14 percent increase in first-quarter earnings Thursday, but the results missed Wall Street estimates. The world's largest retailer also warned that second-quarter results could be much lower than analysts expected as unseasonably cool weather and higher gasoline prices continue to hurt business.

...and asks: "What is wrong with this picture?"

There are more questions to ask about the economy when you read about the rise in jobless claims in the US:

Initial jobless claims unexpectedly rose by a seasonally adjusted 4,000 to 340,000 last week, the U.S. Labor Department announced Thursday. This was reported to be the highest level of claims since the week ended April 2... The four-week moving average was 324,000, an increase of 2,000 from the previous week's revised average of 322,000.

...and the gloomy outlook in Europe:

Better than expected figures showed that the German economy, Europe's biggest, expanded by 1 per cent over the first three months of this year, in its best quarterly performance for four years.

The sudden German revival, after a 0.1 per cent decline in the previous quarter, boosted economic activity across the eurozone, with a first quarter expansion for the 12-nation bloc of 0.5 per cent, up from 0.3 per cent in the three months before.

But economists said that this was likely to prove "as good as it gets" for the eurozone, with Germany’s resurgence driven entirely by exports and likely to run out of steam.

Pessimism over the outlook was deepened by the news from Italy and the Netherlands. In Italy much worse than forecast data showed the economy shrank by 0.5 per cent in the first quarter. After a 0.4 per cent decline in the final quarter of last year, this left Italy in the grip of a technical recession. The Netherlands suffered the same fate, with its GDP falling by 0.1 per cent in the first quarter, after stagnating in the previous one.


The Organisation for Economic Co-operation and Development said that its monthly indicator of world prospects fell in March in all seven leading industrial economies.

...while things are little better in Japan (also highlighted by Calculated Risk):

Japan's index of leading economic indicators was below 50 percent in March for a second month, suggesting that the country's economic growth may stall, the Cabinet Office said Wednesday. The index, which measures indicators such as job offers and consumer confidence, rose to 30 percent from 18.2 percent in February, the Cabinet Office said.

Even China may not be immune to a slowdown, after a reported fall in foreign investment:

China attracted $4.08 billion in foreign direct investment in April, down 27 percent on a year before, in what some said could be dampened interest in the world's seventh-biggest economy. For the first four months, foreign direct investment was $17.47 billion, just 2.24 percent higher [than] a year earlier and showing a marked slowdown from the 14 percent growth seen in 2004's full-year figures...

Separate figures for deals that had been signed but not yet executed showed investment of $14.9 billion in April, higher than the $12.3 billion seen in the same month last year, official data showed on Thursday. Such "contracted" FDI for the first four months was $50.15 billion, the Commerce Ministry said on its Web site (http://www.mofcom.gov.cn).

This comes in the wake of new measures by the Chinese government to cool excessive investment, for examples, in steel:

China will start to ban iron and steel processing trade on May 19, the Ministry of Commerce said yesterday. The measure means that processors in China will be prohibited from making goods for overseas clients with imported iron ore, pig iron, steel scraps, billets or ingots provided by overseas clients.

...and property:

The Chinese government has moved to impose new taxes and restrictions on property transactions in what appeared to be its strongest attempt yet to prevent a property bubble from developing in China's biggest cities...

[T]he government said Wednesday that beginning June 1 it would impose a nationwide tax on all properties sold within two years of being purchased and occupied... The government also said that it would impose a tax on land that was not developed within a year of being acquired and that it would revoke land-use rights if nothing is built on a parcel of land more than two years after those rights were acquired.

Morgan Stanley's Andy Xie has said that "the party doesn't end until property prices fall". So is this the beginning of the end?

Thursday, 12 May 2005

US March trade deficit falls

The big news from yesterday was on the US trade deficit released by the Commerce Department. The deficit fell to US$55.0 billion, US$5.6 billion less than the revised US$60.6 billion in February. A fall in imports -- by US$4.1 billion compared to February -- accounted for most of the drop in the deficit.

Kash at Angry Bear has a couple of posts on the trade data.

"US Imports: What and from Where?" looks at the sources of US imports and finds that they include not only low-cost countries like China but also countries like Canada and the EU. The conclusion: "The cause of the trade deficit is therefore clear: it is simply the direct result of the US's lack of saving."

"The US's Comparative Advantage" looks at the categories of goods that the US has a comparative advantage in and finds that these include agricultural products, capital goods and industrial supplies. He concludes that "as soon as individuals and/or the federal government in the US start spending less and saving more, we can expect trade surpluses to return in those categories."

The macroblog reports on the news and also points to a paper on the sustainability of the US current account deficit by Michael Kouparitsas from the Chicago Fed, which concludes as follows:

My estimates suggest that the U.S. net export deficit must fall by 3% to 3.5% of GDP to maintain the current net foreign asset to GDP ratio. However, I also note that if the U.S. continues to enjoy relatively high rates of return on its foreign assets, the resulting net foreign income surplus would allow it to run relatively large net export deficits without much change in the net foreign asset to GDP ratio.

Predictably, Brad Setser had something to say about this conclusion -- see the comments section of the post.

Over at his own blog, Setser and his readers also discuss the trade deficit. The points on seasonal effects are especially interesting.

Wednesday, 11 May 2005

Another look at US employment

Barry Ritholtz points to this insightful commentary from Paul Kasriel of Northern Trust. Excerpt:

... The 274,000 reported increase in April nonfarm payrolls led many analysts to conclude that the first quarter slowdown in economic growth was just a temporary "soft patch." The monthly Employment Situation report is compiled by the Bureau of Labor Statistics (BLS)...

... [T]he Employment and Training Administration (ETA)...brings us the initial and continuing state unemployment claims data on Thursday mornings. The ETA has been publishing data of late suggesting that the labor market is cooling off and that the economy is too...

[W]e trust initial jobless claims over nonfarm payrolls to tell us where the economy is going for three reasons. Firstly, claims tend to get revised less radically than do nonfarm payrolls. Secondly, claims lead payrolls. Thirdly, claims lead measures of economic activity whereas nonfarm payrolls lag or, at best, are coincident with measures of economic activity...

But when I look at his charts, I am still not convinced that this isn't just a soft patch. Maybe I'm too skeptical.

Meanwhile, PGL and William Polley look at the effect of demographics on the employment to population ratio. Also note the comments, especially at PGL's post.

And as if all that is not enough, human resource management is also changing -- see for example "IBM's Supply Chain for Deploying People" -- which should also affect employment trends and the economy.

Tuesday, 10 May 2005

Industrial output disappoints in Malaysia, Germany and UK, but is soft patch over?

In news out yesterday, March industrial output in Malaysia, Germany and the UK all turned out lower than expected.

Malaysia's March Output Weaker Than Expected
Malaysia's industrial output grew surprisingly slowly in March as a labor crunch limited manufacturing production, economists said Monday. According to the Statistics Department, the Index of Industrial Production - which measures output levels in the manufacturing, mining and electricity sectors - rose 5% over the year in March. A moderation in growth had been expected, but the sharp slowdown took economists by surprise...

German March Industrial Production Falls on Oil Price
Industrial production in Germany, Europe's largest economy, fell for a second month in March, adding to evidence the surge in oil prices is eroding growth. Production at factories, construction sites, utilities and mines declined 0.8 percent from February, when it dropped 2.1 percent, the Economy and Labor Ministry in Berlin said today. Economists expected production to fall 0.4 percent, the median of 40 forecasts in a Bloomberg survey showed...

UK March manufacturing output falls 3rd month in a row; to weigh on Q1 GDP
Manufacturing output in the UK...fell for the third month running in March signalling that sector is in decline, official figures showed today. The office of National Statistics revealed that manufacturing output in March fell 1.6 pct from the previous month against expectations of a modest 0.1 pct increase...

The wider measure of industrial production, which also includes such things as oil production and therefore accounts for just over 20 pct of GDP, was 1.2 pct down on a monthly basis against expectations of a 0.1 pct improvement...

Less surprisingly, the Bank of England elected to leave interest rates unchanged at 4.75 percent yesterday.

Last Friday's report on US job gains leaves at least some hopeful that the "soft patch" is over -- for example, Morgan Stanley's Richard Berner and David Greenlaw:

Is the Soft Patch Over?
Strong job and income gains have suddenly changed the color of the expansion, from fragile to vigorous, and have reawakened inflation concerns -- or have they? While we’ve scaled back our 2005 growth forecast from 3.8% a month ago to 3.5% today, we believe that the analytics for a sustained, hearty rebound are intact, and that upside risks to inflation will persist. Nonetheless, it will likely take a few more months of hearty data to convince consumers and investors that the economy’s resilience has overcome hurdles to growth and that stagflation is unlikely...

And yesterday's report on US wholesale inventories probably did not change that view.

Weak wholesale stocks signal softer GDP
Inventories at U.S. wholesalers rose a smaller-than-expected 0.4 percent in March, Commerce Department data showed on Monday, prompting economists to cut forecasts for first-quarter growth... The weaker March number was due in part to a decline in the stockpile of cars and professional equipment like computers.

The Commerce Department said inventories of durable goods...edged up 0.1 percent in March. Inventories for non-durable items increased 1.0 percent as stocks of petroleum jumped 9.3 percent, the largest increase since July 2004.

"Based on this result, we now see Q1 GDP being revised down to plus 2.8 percent from plus 3.1 percent," said Morgan Stanley economist Ted Wieseman... The first quarter had already seen a large buildup of inventories, and if that number is revised down, it may not be all that bad for growth, Wieseman said, because stocks would probably have fallen in the second quarter anyway. Overall, the latest indications are that the U.S. economy is still healthy...

We'll get more economic indicators over the next few days. Whether the picture becomes clearer is another matter.

Monday, 9 May 2005

Leading indicators point down -- or up?

Barry Ritholtz quotes Barron's Alan Abelson, who cites Merrill Lynch's David Rosenberg:

April's jobs data, he feels, "vastly overstated economic conditions last month." The gains that supposedly occurred in retail, construction and telecom just don't square with what has been happening in those sectors. He notes that the economy is undergoing a classic inventory correction and the trend in the leading economic indicator is down.

Well, the Conference Board's leading index has indeed been declining. However, Lakshman Achuthan, managing director at the Economic Cycle Research Institute, seems to think differently. He told SmartMoney.com:

We view the weakness in manufacturing, or GDP or employment numbers...as part of a slowdown that has been going on for a year. That's in contrast to those who view it as a new slowdown. We think it's the end of the slowdown. These things tell you about the current economy or the recent past. They, by definition, can't forecast. They don't tell you about the future. To [forecast] -- is it going to be softer, in the middle or stronger -- we look at the leading indicators, which are composite indexes. We look at a bunch of them, which are designed to lead turning points in the economy. They seem to have made their lows months ago. Now they're rising, which we translate into a forecast of a firmer economy in the second half of 2005 as opposed to an economy that's below trend or experiences a vicious cycle of downturn.

I sum up some of the recent news on the economy in "US employment growth underlines economy's resilience".

Saturday, 7 May 2005

US jobs surge in April

The US Labor Department's employment report for April released yesterday was very good: 274,000 jobs, with upwardly revised gains of 300,000 in February and 146,000 in March. The macroblog provides plenty of perspectives on these numbers as well as those from the previous day's productivity and initial claims reports.

This is one reason that I have not been willing to write off the economic expansion. Not so much the numbers themselves but the upward surprise. Not for the first time, as soon as economists factor in all the negatives in their forecasts, you get a positive surprise somewhere.

However, Kash at Angry Bear highlights the US economy's dependence on the construction industry.

Construction in the Economy
An interesting question in the air this week is this: to what degree is the US economy shifting resources out of other sectors of the economy and into construction projects?... Clearly the house-building industry is highly cyclical. In part it depends on interest rates... But...interest rates do not explain all of the movements of resources into and out of construction...

If so, then perhaps higher interest rates (when they finally do arrive) may cause construction activity to fall not so much because of their direct effect, but more because of how they may contribute to a shift in the psychology of builders...

Also significantly, there was no improvement in manufacturing employment. Which brings to mind what Morgan Stanley's Daniel Lian had written last week:

The rapid growth of Chinese manufacturing was not at the expense of the developing world... The rise of Chinese manufacturing is clearly at the expense of the manufacturing sectors in developed countries.

Speaking of Morgan Stanley and China, Andy Xie has an interesting commentary yesterday on why he thinks China will not revalue the renminbi soon.

The global economic cycle could well turn down next year. China's trade performance would also deteriorate with it, and the pressure on China to revalue would evaporate. I believe it is in China's interest to stall on the currency issue.

However, US workers -- especially in manufacturing -- may have some things to say about that.

Friday, 6 May 2005

US productivity up in first quarter

Yesterday, I mentioned Bill Cara's long-term optimism for equities based on his view that productivity will grow faster than inflation. His take on the Labor Department's report on productivity yesterday:

This morning, the U.S. Labor Department reported that workplace productivity for 1Q05 rose at an annual rate of 2.6 pct, which is faster than the growth in PPI/CPI. Moreover, first quarter unit labor costs -- which is a key driver of inflation -- increased at a 2.2 pct annual rate, and compensation grew at 2.4 pct annually (after inflation). So, again, the big picture remains positive for the economy in terms of the growth in real wealth....

MarketWatch, in reporting this news, quoted Joshua Shapiro, chief economist for MFR Inc, as saying: "The harshest cost-cutting by the corporate sector has run its course." Tell that to IBM, which announced yesterday that it will cut 10,000 to 13,000 jobs worldwide.

Thursday, 5 May 2005

ECB holds interest rates unchanged, Cara sees bull market

The European Central Bank became the latest central bank to announce its decision on monetary policy yesterday, and, as expected, it elected to hold interest rates unchanged. The Prudent Investor provides the details.

The ECB's decision follows similar ones by the central banks of Japan and Australia over the past week, and the Bank of England is expected to follow in their footsteps as well next Monday. These decisions come in the wake of increasing signs of a global economic slowdown.

These signs did not stop Bill Cara from writing a post on Tuesday in which he said he believed that "we are still in a bull market". Although he thinks that equity markets are experiencing a "bear cycle", he is more optimistic of the longer term.

For the future, given that inflation is controlled in the U.S. and around the world, and that productivity is growing relatively faster, I truly believe that new investment opportunities presented by the digital age are compelling ones, and I’ll be taking a more bullish stance to equity trading.

Cara did not say why he thinks that productivity growth will outstrip inflation (he says he would discuss productivity in a future article). Even if it turns out to be true, though, would high productivity growth alone be enough to justify a bull run? I would have thought that the economy and financial markets are somewhat more complex than that.

Barry Ritholtz obviously thinks so, as he explains in a post yesterday.

Single vs. Multiple Variable Analysis in Market Forecasts
What "Single vs. Multiple Variable Analysis" means: due [to] its inherent complexity, Market behavior cannot be explained or predicted by merely looking at just one thing -- a single variable. If it could, than you would be able to pick that factor -- Earnings, GDP, Interest Rates, Sentiment or what have you -- and perfectly forecast what's gonna happen next. Even a moderately accurate set of directional predictions would have obvious value.

But you cannot. At least not on a regular and consistent basis over a very long time... The reality is that not only is market behavior a function of multiple variables interacting, they do so imprecisely -- meaning, the exact same (or at least very similar) data sets at different times sometimes produce different results. Its not just one variable, but many dozens...

It would be interesting to see what more Cara has to say to justify the bullish case.

Wednesday, 4 May 2005

Fed raises, RBA holds

The Federal Open Market Committee raised its target for the federal funds rate yesterday by 25 basis points to 3 percent. While acknowledging that inflation pressure has "picked up in recent months", it also noted that "spending growth has slowed somewhat" and that underlying inflation remains "contained", so "policy accommodation can be removed at a pace that is likely to be measured".

Today, the Reserve Bank of Australia announced that it is leaving its cash rate target unchanged at 5.5 percent, as widely expected.

In other economic news, the US Commerce Department yesterday released its manufacturing report showing that new orders for manufactured goods in March increased 0.1 percent, reversing a 0.5 percent decrease in February. New orders for manufactured durable goods in March decreased 2.3 percent, revised from the previously published 2.8 percent decrease. New orders for February were reported to have decreased 0.1 percent. New orders for manufactured nondurable goods increased 2.8 percent in March. Shipments increased 1.3 percent, unfilled orders decreased 0.3 percent while inventories increased 0.6 percent.

The UK was hit by a double-dose of bad news yesterday. The Chartered Institute of Purchasing and Supply/NTC Research reported that its purchasing managers' index fell to 49.5 last month -- its lowest reading since June 2003 -- from 51.6 in March, while the Confederation of British Industry's April survey showed that retail sales fell at their sharpest pace since July 1992.

Tuesday, 3 May 2005

Currency, reserve adjustments may aggravate PMI deterioration

Renminbi revaluation has been on a lot of people's minds lately, after a brief rise in the Chinese currency last week.

General Glut, however, is somewhat doubtful that it will happen soon: "Giving signals -- as some are interpreting last week's 20-minute renminbi float -- seems like the last thing China wants to do..."

Nouriel Roubini, though, thinks that an eventual revaluation is inevitable:

[O]rderly global rebalancing requires both "expenditure switching" via a Chinese/Asian appreciation relative to the US dollar and other floating currencies and, at the same time, "expenditure reduction" via a meaningful reduction of the US fiscal deficit that will require some increases in taxes.

His colleague Brad Setser responds to a Goldman Sachs view that 2005 "is likely to see significantly less buying of US Treasuries -- and US fixed income in general -- by Asian central banks" with the following:

... Goldman is right -- there will be less central bank support for the Treasury market. However, overall reserve accumulation though is not likely to fall as much as Goldman suggests (don't forget about the oil exporters) and there could well be more central bank support for other US fixed income markets.

Less reserve accumulation of US assets by Asian central banks, Federal Reserve tightening -- they all point to further downside for the global economy, on top of the latest round of declines in the global and national purchasing managers' indices as highlighted in the following Reuters report.

Factories in the United States and Europe shifted down another gear in April, worldwide surveys of manufacturers showed, indicating an oil-induced soft patch in economic activity persisted into the second quarter...

"The decline in the PMI likely signals the onset of a period of weak growth in industrial production," said David Hensley, director of global economics coordination at JP Morgan... JP Morgan, which compiles an index of manufacturing activity based on the national and regional surveys of manufacturing purchasing managers, said its global Purchasing Mangers Index slipped to 51.9 in April from 52.9 in March...

The U.S. Institute of Supply Management's index of national manufacturing fell to 53.3 from 55.2 in March... The NTC Eurozone Purchasing Managers' Index...slipped to 49.2 from 50.4 in March...

Yes, the eurozone number is below 50. And at the rate the US PMI has been falling over the past year or so -- it has fallen 4 percentage points in the past 4 months -- don't be surprised if it falls below 50 too within the next few months.

Monday, 2 May 2005

Making sense of last week's economic data

Last week's economic reports have left economists divided over its near-term direction.

Some appear internally conflicted. James Mehring wrote this in BusinessWeek:

It is worth noting that the first-quarter real gross domestic product report really wasn't as weak as the 3.1% annualized increase would suggest. More imports, which are subtracted from GDP, weighed on growth, but strong imports do signal healthy domestic demand.

That last statement is meaningful if you think that the demand can easily be converted into production. Otherwise, it sounds more like self-consolation. Not that the trade deficit it implies should be much of a consolation.

The Economist has a more sober analysis.

So far, America’s consumers have saved the day... But to do so, they have taken on a lot of debt... But as interest rates rise, this well of consumer demand seems to be running dry... There had been hope that businesses would step in to help, but the latest figures make that unlikely. Inventories rose sharply in the first quarter...

The Economist also provided an explanation of why US job growth has been poor.

The most likely explanation for sluggish recovery in payrolls comes from Erica Groshen and Simon Potter of the Federal Reserve. They argue that while most unemployment in earlier slowdowns was cyclical -- firms laying off employees who would then get their jobs back (or ones very like them) when the economy picked up -- in the last two it has increasingly been structural, meaning that people need to switch sectors, locations or skills in order to find a job. Since it takes much longer to do the latter, payrolls are not rebounding as they used to.

Another recent report in The Economist warned of the impact that the current account deficit can have on the economy.

[E]ven a gradual reduction in the current-account deficit...could feel unpleasant. That is because America's domestic demand growth will have to grow more slowly than its GDP. A recent analysis by Macroeconomic Advisers, a consulting firm, suggests that halving America's deficit over a decade, with GDP growth at its recent average, will require that annual domestic demand growth slow to 2.6%, more than a full percentage point below its average in 1994-2004.

I look at how the uncertainty in the economy is being reflected in the financial markets in "The elusive consensus".

Sunday, 1 May 2005

Mixed outlook for technology

Outlook for technology stocks looks mixed. Chip equipment makers look like they will be facing a prolonged downtrend.

Chip downtrend has just begun: Gartner
THE current dip in global chip equipment sales isn't just a cyclical blip but the beginning of a downward trend, although the downswing will be milder than in past years, according to researcher Gartner Inc.

In its latest study, Gartner says that after 64 per cent growth in 2004, worldwide chip capital equipment sales are projected to decline 11.6 per cent in 2005, and a further 6.5 per cent in 2006 before recovering in 2007 and 2008...

Among the three equipment segments, the wafer fab equipment market will see the strongest decline...12.2 per cent decline from 2004. The automated test equipment market is the only segment that will show positive spending this year, with an increase of 3.1 per cent...

Memory chip makers, though, may be able to look forward to a bounce in the second half of the year.

Battered memory chip makers look to better second half
Memory chip makers, battered in the first quarter as prices sunk by 40 percent, should fare better in the second half as seasonal demand lifts sales and manufacturing bottlenecks limit supply.

Industry players, led by Samsung Electronics, are switching capacity from lower-end DRAM to flash memory chips used in hot-selling digital cameras and music players. That, combined with the industry migration to next generation technology, should keep supplies tighter after a glut squeezed earnings at global chipmakers in the first quarter...

Microsoft is also expecting a better year ahead.

Microsoft Third-Quarter Profits Double
Microsoft has reported its financial results for the quarter, noting that in the period, profit has nearly doubled. Although sales were below Wall Street estimates, Microsoft expressed an upbeat outlook for the year ahead.

The company had a net profit of US$2.56 billion for its fiscal third quarter, compared to $1.32 billion a year earlier... With its current product pipeline and investment in development of new products and services, the company expects increased revenue growth in fiscal 2006, [Microsoft controller Scott] Di Valerio added...

See also my recent post on technology stocks.