Friday, 30 September 2005

US 2nd quarter GDP and US and German unemployment

The US Commerce Department updated its report on second quarter GDP yesterday. Reuters reports:

In a final estimate of second-quarter gross domestic product or GDP, the broadest measure of national economic performance, the Commerce Department left unchanged its estimate of growth that it published a month ago.

It said revisions upward in spending were offset by somewhat weaker exports of services and inventory-building than it previously thought, leaving second-quarter GDP growth at a 3.3 percent annual rate, slowing from 3.8 percent growth in the first quarter.

The report also mentions a fall in jobless claims.

New claims for jobless pay fell more than expected, by 79,000 last week to 356,000 as hurricane-related applications declined, the Labor Department said... The jobless claims data indicated healthy labor markets in areas outside of the Gulf Coast, analysts said.

The employment situation is worse in Germany.

Unemployment in Germany, Europe's largest economy, jumped in September as people who'd been removed from the Federal Labor Agency's register at the start of the year were reclassified as jobseekers.

The number of unemployed people, adjusted for seasonal swings, rose by 39,000 from August to 4.83 million, the Nuremberg- based agency said today. Economists expected a decline of 12,000, according to the median of 26 forecasts in a Bloomberg survey. Without the statistical effect September jobless fell 22,000.

"The underlying decline of 22,000 in seasonally-adjusted unemployment is 100 percent due to subsidized labor," said Holger Fahrinkrug, an economist at UBS AG in Frankfurt. "These are de- facto unemployed people who are no longer included in the statistic." The increase in oil costs may prompt companies to cut staff to restore profit margins, Fahrinkrug said.

Thursday, 29 September 2005

US durable goods orders jump but confidence mixed around the world

The US economy may slow down in the aftermath of the destruction from hurricanes...

White House economist Ben Bernanke said on Wednesday that the administration expects the hurricanes that battered the Gulf Coast to shave up to 1 percentage point from the U.S. growth rate in the third quarter, but that there was little chance of a recession.

...but the underlying economy is still relatively robust, as indicated by the durable goods report.

New orders for U.S. durable goods jumped more than expected in August... Demand for long-lasting durables climbed 3.3 percent in August, as orders for metals, machinery, computers and electronics rose, the Commerce Department said on Wednesday.

Orders excluding more volatile transportation surged 4.2 percent, the biggest rise since March 2004... Demand for non-defense capital goods excluding aircraft...rose 3.6 percent in August after a 3.3 decline in July. Orders of durable goods rose across all major categories.

And despite weakening consumer confidence, retailers remain hopeful that consumer demand will stay resilient.

Even as higher energy prices siphon more consumer dollars, buyers remain willing to move up the price continuum for goods with different styles or features that make life more convenient, company executives and analysts told the Reuters Consumer and Retail Summit. And high-end spending isn't limited to the wealthy either, they added.

This despite households going further into debt, as highlighted by Calculated Risk.

The household DSR (Debt Service ratio) set another record at 13.55%, up from 13.46% in Q1 '05. The owner FOR (Financial Obligation Ratio) set a new record of 16.37%, up from 16.25% in Q1 '05.

There was also plenty of data from Europe yesterday.

Confidence among German consumers and French executives declined in September... German consumer confidence slid to a nine-month low, the Nuremberg-based GfK market research company said today. An index gauging sentiment among 2,000 French manufacturers fell to 100 from 101 in August, according to Paris-based national statistics office Insee...

Business confidence unexpectedly increased in Germany, Italy and Belgium as the euro's 11 percent decline against the dollar this year makes European goods more competitive abroad, industry surveys published in the past week showed. In Italy, the Rome-based Isae Institute said today its confidence index rose to a 10-month high of 89.5 from a revised August reading of 87.8, its fourth straight advance.

Things look a bit gloomier in the UK.

The U.K. economy expanded at the slowest annual pace in more than 12 years in the second quarter... Europe's second-largest economy grew 1.5 percent from a year earlier, instead of the 1.8 percent estimated on Aug. 26, the Office for National Statistics said in London today... The economy grew an unrevised 0.5 percent from the first quarter, the statistics office said...

Britain's top business lobby, the Confederation of British Industry said today that its retail sales index slid to the lowest since records began in 1983 in September...

In a separate release, the statistics office also said the U.K. current-account deficit narrowed to 3.05 billion pounds in the first quarter, from a revised 7.34 billion pounds in the first.

In Sweden, the National Institute of Economic Research yesterday released its survey findings for business:

The confidence indicator for industry has fallen somewhat and is now slightly above the historic average. In the near future, satisfactory growth is expected but also a continued drop in industrial jobs.

...and for consumers:

Households remained optimistic in September. The Consumer Confidence Indicator (CCI), though down marginally from August at 13.2, was still the second highest this year.

In Switzerland, the Swiss Institute for Business Cycle Research released its index of leading indicators for September.

(Current level of the KOF economic barometer: September 0.77, August 0.70, July 0.63. Level a month ago: August 0.71, July 0.64). The forecast of an acceleration of GDP growth in the 4th quarter is confirmed by the latest development of the barometer. In addition, it is to be expected that the pick-up in growth will continue till the 1st quarter of the coming year.

And from Japan, another business sentiment indicator.

Small and medium-sized Japanese firms were more optimistic about economic conditions in September, a survey showed on Wednesday, suggesting the economy's recovery was spreading beyond big businesses.

The survey, by Shoko Chukin Bank, produced a reading of 50.4 in the diffusion index measuring business sentiment, above the neutral 50 level for the first time in 14 months and an improvement from 48.3 in August.

So what do all these add up to? An uncertain global economy that continues to be led by a resilient underlying US economy while Japan's economy recovers and Europe's remains mixed.

Wednesday, 28 September 2005

Fed chairman speaks amid mixed housing and confidence data

Compared to the previous day, yesterday's news from the US was certainly more downbeat.

New home sales were relatively weak in August. At a seasonally-adjusted annual rate of 1.237 million, 9.9 percent less than the 1.373 million in July, itself revised down from an earlier-reported 1.41 million. House prices did rise slightly though.

The Conference Board's consumer confidence index fell to 86.6 in September from 105.5 in August. The present situation index decreased to 108.9 from 123.8 while the expectations index fell to 71.7 from 93.3 last month.

Confidence unexpectedly improved in Germany though. The Ifo institute's business confidence index rose to 96 from August's 94.6. However, Ifo said the 20 percent of replies received after the recent election tended to be more pessimistic.

The other interesting news item from yesterday was Federal Reserve chairman Alan Greenspan's speech to the annual meeting of the National Association for Business Economics in Chicago.

In perhaps what must be the greatest irony of economic policymaking, success at stabilization carries its own risks. Monetary policy--in fact, all economic policy--to the extent that it is successful over a prolonged period, will reduce economic variability and, hence, perceived credit risk and interest rate term premiums.

... Whatever the reason for narrowing credit spreads, and they differ from episode to episode, history cautions that extended periods of low concern about credit risk have invariably been followed by reversal, with an attendant fall in the prices of risky assets.

[B]ecause it is difficult to suppress growing market exuberance when the economic environment is perceived as more stable, a highly flexible system needs to be in place to rebalance an economy in which psychology and asset prices could change rapidly.

And what did the markets do immediately after his remarks? According to Reuters:

Prices for both U.S. stocks and government bonds rose a bit after his remarks as traders showed relief he had not signaled higher-than-expected interest rates ahead.

Irony indeed.

Tuesday, 27 September 2005

Strong housing, inflation and manufacturing data

Yesterday's news perhaps provide some justification for continued increases in interest rates worldwide.

The US housing market remains strong, according to the National Association of Realtors. Total existing-home sales increased 2.0 percent in August to a seasonally adjusted annual rate of 7.29 million from a pace of 7.15 million in July. The national median existing-home price for all housing types was $220,000 in August, up 15.8 percent from August 2004; this is the strongest rate of appreciation since July 1979.

In Germany, the inflation rate rose to its highest level in over four years in September. The consumer price index (CPI) rose by 2.5 percent on the year, the Federal Statistics Office said yesterday. This was the highest level since June 2001. Compared with August, prices rose by 0.4 percent. High oil prices and a hike in tobacco tax were mainly to blame for the rise.

And manufacturing continues to recover. In Japan, the business survey index of sentiment at large manufacturers rose to plus 6.4 in the July-September quarter from minus 2.4 in April-June, while the indices for their expectations for October-December and January-March were at plus 11.1 and plus 9.0 respectively. In Taiwan, manufacturing output grew 5.35 percent in August over a year earlier, while export orders rose 22.65 percent to US$22.151 billion, a record high. And in Singapore, manufacturing output rose 11.8 percent in August over a year earlier and 2.5 percent over the previous month.

Saturday, 24 September 2005

Inflation accelerates

Inflation is accelerating around the world, no thanks to high oil prices.

On Thursday, Statistics Canada reported that Canada's consumer price index (CPI) was up 2.6 percent in August compared to a year ago.

Yesterday, the German state of Hesse reported an inflation rate of 2.2 percent for September, its highest rate in four years. Also yesterday, the Federal Statistical Office of Germany reported that the index of import prices rose by 4.7 percent from a year ago, the same rate as in the previous month, and by 0.9 percent from July.

Yesterday also saw the Hong Kong Census & Statistics Department report that the territory's CPI rose 1.4 percent in August over a year earlier, up from July's 1.3 percent rise.

In comparison, the 0.7 percent rise in Singapore's CPI in August compared to a year ago, as reported by the Department of Statistics, is small. However, it represents a sharp 0.5 percent rise from July.

Friday, 23 September 2005

Economy on the wane even before the hurricane

Even as the United States braces for Hurricane Rita the effects of Hurricane Katrina are being assessed.

The chief executives of large U.S. companies expect sharply lower capital spending in the wake of Hurricane Katrina, but generally expect their businesses to absorb the impact of the disaster, an updated quarterly survey found... The [Business Roundtable's] overall economic outlook index fell to 88.2, compared with a pre-hurricane reading of 95.9. That is the index's lowest level since October 2003.

But the economy was wavering even before Katrina hit.

The index of leading economic indicators fell 0.2 percent in August, according to the New York-based Conference Board, a slightly smaller-than expected decline... July's indicators were revised to show a 0.1 percent drop from an original 0.1 percent increase... Only three of 10 components in the index fell, but the biggest drop -- lower consumer expectations -- was hefty. That trend continued into September, according to the latest University of Michigan sentiment survey...

Another index that tracks a range of economic data -- the Chicago Federal Reserve's national activity index, slipped in August but still suggested above-trend growth as well as the potential for inflationary pressure over the next year...

The Labor Department said the number of Americans applying for first-time unemployment benefits rose to 432,000 last week, up from a revised 424,000 in the previous week, originally reported at 398,000... Unadjusted for seasonal factors, jobless claims linked to Katrina totaled 194,000 in the past two weeks.

If the US economy's outlook appears to be weakening, the sustainability of Japan's recovery also appears to be in doubt. Japan's exports were up 9.1 percent in August compared to a year earlier, but a 21.1 percent rise in imports, mainly due to oil, cut its trade surplus by 80 percent. And the resilience of domestic spending remains questionable; the tertiary index, which measures spending in the services sector, was down 0.8 percent in July from the month before while the all-industries index, a proxy for overall economic activity, was down 0.8 percent from the month before.

Things don't look much better in Europe. Although the Conference Board's leading index for Germany rose 0.4 percent to 104.3 in July, Eurostat reported that industrial news orders in the euro-zone fell by 1.6 percent in July over the previous month while EU25 new orders fell by 0.7 percent. And in the UK, a Confederation of British Industry survey showed that a balance of minus 27 percent of firms reported that total order books were below normal in September -- only slightly up on August when it had been the lowest since October 2003 -- the balance for export orders weakened to minus 25 per cent -- their lowest levels since January -- but the balance for firms expecting to increase output rose to a positive 6 percent.

Thursday, 22 September 2005

Demand in emerging Asia

Seems like everyone wants emerging Asia, especially China, to boost demand.

The New Economist points to an article on global imbalances in the Financial Times by Martin Wolf (subscription required) that concludes as follows:

The bottom line is straightforward: to be confident of a benign adjustment one needs changes in policies in several places at once. Among the most important elements of such policies are significant movements in real exchange rates, higher savings in the US and higher spending, relative to GDP, in the rest of the world, but particularly in emerging Asia. The result would not only be more balanced global growth, but each region would be better off.

Now, we have this news report that the United States will use G7 talks this week to press China for more currency reform and to boost domestic demand.

Treasury Undersecretary for international affairs Tim Adams said the United States was monitoring the Chinese yuan closely after Beijing staged a small but politically symbolic revaluation of the currency on July 21...

"We're in constant contact with our colleagues in China," he told reporters. "Implied in that support is an expectation that they will indeed follow through on what they said and what they continue to say they're going to do, which is greater flexibility over time," he said...

More generally, according to Adams, Snow will use the G7 meeting to press the US case for a realignment of global imbalances that have seen the US trade deficit bulge while China and other Asian nations build up huge surpluses.

All this seems to be happening even before economists have settled on exactly why demand is low in emerging Asia relative to savings. And don't forget that there is a corporate savings glut too; share buybacks in the second quarter rose 92 percent in the US compared with the same period last year.

Meanwhile, developed Asia hasn't been developing so well either. Hopefully, things may change for the better.

Land prices in Tokyo have risen for the first time since 1990, the government said Tuesday, bearing out ever-widening views of a pickup in the economy.

Average land prices in Tokyo's 23 wards as of July 1 increased 0.5 percent in residential districts and 0.6 percent in commercial areas over last year, marking the first rises since the burst of the bubble economy, according to the annual survey by the Land, Infrastructure and Transport Ministry.

On a national basis, the land ministry said average prices for both residential and commercial land were down for the 14th straight year but with signs the fall in rural areas is coming to a halt.

The margin of decline shrank in 29 prefectures for residential areas, up from 19 prefectures in the previous year. For commercial areas, the margin of decline shrank in 37 prefectures from 29 a year ago.

Japan over the past one and a half decade does provide a lesson on what could go wrong if policy-makers make the wrong decision.

Outlook for chip-equipment and PC makers

According to VLSI Research Inc, the worldwide chip-equipment book-to-bill ratio hit 1.05 in August, up from 1.01 in July. North American-based manufacturers of semiconductor equipment posted a book-to-bill ratio of 1.05 in August, up from 0.93 in July, according to the Semiconductor Equipment and Materials International (SEMI), while Japanese semiconductor production equipment manufacturers posted a book-to-bill ratio of 1.08 for August, unchanged from July, according to the Semiconductor Equipment Association of Japan (SEAJ).

However, the book-to-bill ratio is projected to fall to 0.96 in September, according to VLSI Research. "The nagging question is whether high utilization rates will translate into a surge in equipment orders in 4Q '05," VLSI said, citing concerns over macroeconomic fundamentals. "With electronics soft, we could see a sharp slowing in chip production if Christmas demand doesn't materialize. Everyone is worried about gas prices, consumer debt, and the economy, which are holding back excesses."

IDC, though, expects PC demand to remain strong through 2005, with total PC shipments in the second half of 2005 now expected to reach nearly 110 million, up from the forecast of 107.2 million units in May.

Despite the mixed outlook, and the recent deterioration in electronics exports, Singapore continues to bank on electronics manufacturing and the chip industry in particular.

Wednesday, 21 September 2005

Fed hikes rates as indicators give mixed picture

As expected -- and despite Hurricane Katrina -- the Federal Open Market Committee decided yesterday to raise its target for the federal funds rate by 25 basis points to 3.75 percent. Among the econ bloggers who analysed the FOMC statement, William Polley thinks that the "changes in the wording were stronger in some ways than I would have anticipated and not as strong in others", but "is very consistent with...the possibility that the eventual target...for the funds rate is inching up".

But Katrina does seem to be affecting the economy nevertheless. Reuters reports:

Chain store retail sales dropped significantly in the latest week as a result of high gasoline prices, ripple effects from Hurricane Katrina and increased consumer concern about the future of the economy, reports said on Tuesday.

Sales slid 2.1 percent in the week ended September 17, compared with 0.2 percent decline the previous week -- the largest weekly dip since December 6, 2003 when the index fell 2.5 percent, the International Council of Shopping Centers and UBS said in a joint report...

The falling index follows last week's dip in U.S. consumer confidence as the ABC News/Washington Post Consumer Comfort Index fell to -20...

Separately, Redbook Research said sales in September to date were up 0.4 percent versus the same period in August compared with from last week's 0.5 percent increase...

And the US housing market, which the Fed is undoubtedly concerned with, may be softening as well. Following the report on Monday that the National Association of Home Builders/Wells Fargo Housing Market Index declined two points in September to a score of 65, the lowest since July 2003 and the third consecutive month of declines since June's 72 reading, yesterday, the Commerce Department reported that housing starts dropped by a larger-than-expected 1.3 percent in August to a 2.009 million unit annual rate, down from July, which saw starts revised down to a 2.035 million unit pace from an originally-reported 2.042 million unit pace, while permits for future groundbreaking fell 2.2 percent to a 2.124 million unit pace.

On the other hand, the UK housing market appears to have hit a trough. Rightmove reported that house prices fell in August, but sales rose. Similarly, the Royal Institution of Chartered Surveyors said house prices fell at the slowest pace in almost a year in August, while enquiries from new buyers rose at its fastest rate since January 2004. And yesterday, the British Bankers' Association said that mortgage lending picked up in August.

In Canada, strong housing demand was among the components that helped propel the composite leading indicator to a 0.3 percent gain in August, the same as in July, even though housing starts fell for the month.

Germany, on the other hand, saw investor confidence weakening in September, the ZEW index falling to 38.6 from 50 in August. The standoff between Christian Democratic Union leader Angela Merkel and Chancellor Gerhard Schroeder after the weekend election is believed to have contributed to the weaker sentiment. On Monday, the HWWA institute in Hamburg had reduced its 2005 growth forecast for Germany by 0.1 percentage point to 0.6 percent and its 2006 projection to 1 percent from 1.3 percent.

This seems to validate Edward Hugh's assessment of Germany's economy, of which he is no more optimistic than Japan's, demographics being an important consideration.

And speaking of demographics, Hugh has just added another to a series of posts on demographics and savings, this time on Taiwan, with conclusions that may have ramifications on the much-discussed issue of global rebalancing.

Saturday, 17 September 2005

Post-Katrina US economic indicators and Q2 current account deficit

More indicators on the post-Katrina conditions in the US are arriving and they appear to be confirming expectations of a slowdown.

Reuters reports on the Economic Cycle Research Institute's weekly leading index...

A jump in initial jobless claims after Hurricane Katrina caused a leading index of the U.S. economy to slip in the latest week, a report said on Friday.

The Economic Cycle Research Institute, an independent forecasting group, said its weekly leading index edged down to 135.3 in the week ended September 9 from a downwardly revised 135.8 in the prior week.

The index's annualized growth rate eased to 2.9 percent from 3.1 percent.

... as well as on the University of Michigan's consumer sentiment index.

The University of Michigan's closely-watched consumer sentiment index fell to 76.9 in September from 89.1 in August, far below Wall Street forecasts and the 81.8 hit after the September 11, 2001, attacks on New York and Washington.

The current conditions dropped to the lowest level since December 2003 while the expectations index plummeted to the lowest since February 1992.

The report also covered the US current account deficit for the second quarter.

[T]he Commerce Department said the U.S. current account deficit narrowed in the second quarter to $195.7 billion, but the previous quarter's record deficit was revised even higher.

The quarterly shortfall, the second highest on record, compared with Wall Street forecasts for a deficit of $193.0 billion. The first quarter gap was revised to a record $198.7 billion from the initial $195.1 billion deficit...

The quarterly current account deficit ran at 6.3 percent of gross domestic product in the second quarter compared with 6.5 percent in the previous three months.

Brad Setser analysed the current account data, as well as the TIC data for July, also released yesterday. I thought the following is worth highlighting.

[T]he US continues to earn far more on its direct investment abroad ($120 b in the first half of 2004) than foreigners earn on their direct investment in the us ($62.5 b). The US has a bit more direct investment abroad and foreigner have investment in the US, but not two times as much. The US just gets more income from investing abroad than foreigners get (or report?) on their investment in the US. I don't quite see how the low realized return on direct investment in the US offsets the exchange rate risk associated with investing in a major deficit country ...

However, the IMF provided a different perspective in its recent World Economic Outlook report. The Economist provides a summary of the perspective.

... Emerging markets saw a return on aggregate capital of 13.3% over the 1994-2003 period, compared with 7.8% in the G7 group of industrialised nations. But investments in emerging markets are riskier, because their economies tend to be more volatile and their institutions weaker.

Moreover, the return on aggregate capital may not be a good guide to the returns that investors can actually expect. Growth could be concentrated in smaller firms that are harder to invest in, for instance, or the data could be unreliable. Indeed, the IMF’s analysis suggests that the internal rate of return on invested capital in publicly traded firms in emerging markets has been very poor over the past decade, even before currency risk is taken into account.

Perhaps this is one reason the IMF also found that investment in emerging Asia has fallen in recent years. And this is important to the US because the IMF also believes that an "investment recovery in Asia (excluding China) and oil-producing countries would offer a significant contribution to the resolution of current account imbalances".

Along these lines, Ben Carliner thinks that the Asian Bond Market Initiative may help re-direct some of Asia's savings to fund domestic investments.

Domestic Asian bond markets...will provide opportunities for Asian savers to invest at home... [I]n the medium to long term, deep and liquid capital markets in East Asia could fundamentally reshape the international financial landscape and provide a mechanism for unwinding the global savings imbalance.

And Morgan Stanley economists Stephen Roach and Richard Berner think that recovering economies in Japan and Europe will also divert funds away from the US, although colleague Stephen Jen does not.

Who is likely to be correct? Let's go back to the IMF for clues. According to the FT:

The International Monetary Fund has become increasingly pessimistic about the prospects of Europe's economies while raising sharply its forecast for Japan. In a draft of its twice-yearly forecasts, seen by Financial Times Deutschland, the fund highlights the vulnerability of European economies to oil price shocks.

... It still believes Germany will grow by a sluggish 0.8 per cent this year [but] it has cut its forecast for 2006 to 1.2 per cent from 1.9 per cent.

For France...the IMF expects a growth rate of 1.5 per cent this year, compared with 2.0 per cent in its April forecasts. The 2006 forecast has been revised down from 2.2 per cent to 1.8 per cent.

In Italy, suffering a recession, zero growth is expected this year, compared with the 1.2 per cent the IMF originally expected.

Predictions for the UK have been revised down to 1.9 per cent in 2005 and 2.2 per cent next year, compared with previous forecasts of 2.6 per cent for both years.

In contrast, the IMF believes that Japan's economy will grow by 2 per cent this year and in 2006...

The US economy...growth hardly changed from that in April, the IMF expecting growth of 3.5 per cent in 2005 and 3.3 per cent in 2006.

Friday, 16 September 2005

US CPI up on energy, jobless claims surge in Katrina's wake

Reuters summarises the economic news from the US.

Gasoline prices that were soaring even before Hurricane Katrina struck pushed U.S. inflation ahead swiftly last month... The Consumer Price Index jumped 0.5 percent in August, but the core index, which strips out volatile food and energy costs, moved up just 0.1 percent, the Labor Department said...

The New York Federal Reserve said its index of New York State factory activity fell to 16.97 from August's 23.04, but it was still stronger than many on Wall Street had expected. However, the Philadelphia Fed's index of mid-Atlantic factory activity plunged to 2.2 in September from August's 17.5...

In a sign of the storm's human toll, first-time claims for state unemployment aid shot up 71,000 last week. It was the biggest jump since blizzards shut down much of the U.S. Eastern seaboard in January 1996. The increase took initial claims up to 398,000 in the week ended September 10, the highest level in two years.

Mark Thoma has more on these, as well as the report on sales and inventories for July, which showed the former rising 1.1 percent and the latter falling 0.5 percent.

For the UK, Edward Hugh points to the disappointing retail sales for August -- which were flat -- and for July -- which were revised down to minus 0.6 percent. However, the Conference Board's leading index for the UK did show a rise of 0.4 percent to 133.1 for the month of July, reversing declines in recent months. The Conference Board's leading index for France had also increased in July -- by 0.5 percent to 106.4.

Edward Hugh also looked at Japan's economy, and is not impressed by it, despite the rise in consumer confidence to 48.4 in August from 48.1 in July. He said that Japan's workforce is in decline and the labour market is tightening, so wages will go up, but demand growth will lag behind wage growth.

The recent news flow on Japan is certainly far from unambiguously strong. Yesterday, the Cabinet Office said that Japan's index of leading economic indicators for July has been revised down to 45.5 from a preliminary 50.0, and is well down from the 63.6 in June.

Certainly, Japan's economic growth is not going to match China's, whose fixed asset investment in August grew 28.5 percent from a year earlier.

Thursday, 15 September 2005

US August retail sales fall, industrial output edges up while China's output surges

Reuters reports on US retail sales and industrial production.

A Federal Reserve report showed August industrial output grew just 0.1 percent. It was the first big economic indicator to exhibit major fallout from the storm, which struck two days before the end of the month but whose effect was felt before it made landfall as oil and gas installations on the Gulf Coast battened down the hatches.

Utilities and mining output were particularly hurt, sliding 0.5 percent and 0.6 percent respectively, and the Fed said Katrina cut overall industrial output by 0.3 percentage point.

But in a sign of an otherwise healthy industrial sector, manufacturing output rose by 0.3 percent...

Separately, the Commerce Department said August retail sales fell 2.1 percent, the largest drop since November 2001. However, sales excluding autos climbed a stronger-than-expected 1 percent, showing strong demand before Katrina struck... Retail sales excluding motor vehicles and gasoline gained 0.5 percent following an unchanged reading in July, it said.

The Reuters report above did not mention August capacity utilisation in the US, which the Federal Reserve reported as 79.8 percent. Neither did Mark Thoma in his post on yesterday's data, apparently because of what Dallas Fed president Richard Fisher said: "We are pondering whether traditional measures of capacity utilization have much meaning in an increasingly interconnected economy."

But I think it is still noteworthy that capacity utilisation, at 79.8 percent, is clearly on a rising trend, having risen from 78.3 percent in August 2004, and is in fact at the highest level since 2000.

Now compare the US data with those from China.

Chinese factories reported production last month of 596.8 billion yuan (73.7 billion dollars), up 16 percent from a year earlier and a rise of 2.7 percent from July, the National Bureau of Statistics said Wednesday... Soaring exports were the major driver, with factories shipping 21.3 percent more to overseas markets, it said...

At the same time, in an indication of growing over-capacity, nearly two percent of last month's output failed to find buyers, the NBS said. This situation is worsening rather than improving, the bureau said, reporting that 98.28 percent of output was sold in August, down 0.51 percentage point from the same month in 2004.

Wednesday, 14 September 2005

Latest US trade deficit, PPI and consumer sentiment

The US trade deficit for July turned out lower than expected. At US$57.9 billion, it was lower than June's revised deficit of US$59.5 billion. Exports hit a record US$106.2 billion while imports, at US$164.2 billion, were actually lower than in June, a fall in non-oil imports more than offsetting a rise in oil imports.

Brad Setser, Calculated Risk (two posts) and General Glut analyse the data.

The producer price index rose 0.6 percent in August. Excluding food and energy, though, the index was flat.

Meanwhile, in news on post-Katrina data, ABC News and the Washington Post reported that their Consumer Comfort Index fell to -20 in the week ending September 11, the lowest level since June 2004, down from a revised -15 the prior week. In spite of this, sales in September to date were up 0.5 percent compared with the same span in August, while sales at major retailers rose by 3.4 percent on a year-over-year basis for the week ended September 10, according to Redbook Research.

Tuesday, 13 September 2005

China's exports rise in August but inflation slows

China's exports continue to rise and feed its trade surplus.

China's trade surplus more than doubled in August from a year earlier to hit about 10 billion dollars, the government reported. The trade surplus last month was 10.04 billion dollars, a rise of 122 percent from August 2004, the commerce ministry said on its website, citing customs authorities.

Exports in August rose 32.1 percent from a year earlier to 67.8 billion dollars, while imports were up 23.4 percent to 57.8 billion dollars, according to the statistics.

With surpluses like this, Brad Setser thinks that "the PBoC's reserves will continue to rise rapidly".

Because the exchange rate is so far (in my judgment) from equilibrium now, absent continued government intervention, it could rise even if China's economy slows. That is the price China could pay for resisting the natural tendency of the RMB to rise amid its (huge) boom over the past couple of years.

That said, China's slowing inflation rate makes it less clear that a substantial rise in the RMB is called for.

China's consumer inflation rate slowed in August, with prices rising just 1.3 percent from a year earlier compared with an increase of 1.8 percent in July, official data showed Monday... CPI rose 2.1 percent for the first eight months of this year, compared with 2.2 percent for the first seven months, 4.0 percent for the same period last year and 3.9 percent for all of 2004, the data showed.

Meanwhile, the IMF yesterday released its latest assessment on China. The IMF stressed the importance of "appropriate policy responses and continued implementation of structural reform". These included steps to drain more of the excess liquidity out of the banking system, granting the People's Bank of China more discretion over interest rate policy, and greater exchange rate flexibility.

Monday, 12 September 2005

Japanese stocks jump on Koizumi victory

Japanese prime minister Junichiro Koizumi's gamble of tying the fate of his government to postal reform paid off handsomely as his LDP party pulled off a convincing victory in yesterday's election.

There were other news to cheer investors in Japan today.

Revised data on Monday showed gross domestic product (GDP) rose 0.8 percent in April-June in real price-adjusted terms, beating both the initial reading for a 0.3 percent increase and economists' consensus forecast of a 0.4 percent rise.

The third straight quarter of expansion was buoyed by strong corporate investment and private consumption, as well as a rebound in exports...

On an annualised basis, GDP expanded 3.3 percent, much stronger than an initial estimate of a 1.1 percent rise and economists' median forecast of a 1.5 percent gain and putting Japan on a par with U.S. economic growth during the same period...

Separate data showed on Monday that Japan's current account surplus rose 0.8 percent in July from the same month a year earlier to 1.6498 trillion yen ($15.09 billion). Exports were up 4.6 percent but the trade surplus narrowed as the pace of rises in imports exceeded that of exports due to higher oil prices.

Investors in Japan obviously liked the news. The Nikkei 225 was up 204 points today, closing at 12,896.43.

While the Japanese market has been focused on the election, the US market has been focused on the effects of Hurricane Katrina. My latest article is on the "Outlook for stocks in the aftermath of Katrina".

Saturday, 10 September 2005

Katrina to affect US growth and inflation adversely amid otherwise-positive trend

A Bloomberg survey shows that economists have reduced forecasts for US growth rates for the third and fourth quarters and raised inflation estimates after Hurricane Katrina.

The world's largest economy will grow at a 3.6 percent annual rate from July through September instead of the 4.1 percent forecasters predicted a month ago, based on the median estimate in the latest monthly survey of 57 economists. The consumer price index may rise at a 3.5 percent rate this quarter from a year earlier, up from last month's forecast of 3 percent...

The forecast for fourth-quarter growth in gross domestic product fell to a 3.1 percent annual rate from the previous prediction of 3.5 percent. Consumer prices may rise 3.2 percent, up from the earlier estimate of 2.9 percent, the survey showed.

However, there was some optimism for 2006.

"We're leaning toward raising" GDP estimates for early 2006 "given the explosive growth that we are seeing for the federal government in terms of spending," said Mark Vitner, a senior economist at Wachovia Corp., in an interview yesterday.

Rupkey, the Bank of Tokyo economist, said there is "always a silver lining, and after every storm there is a period of rebuilding and new construction."

"The scale of rebuilding in the devastated areas of the Gulf Coast will be unprecedented and the sheer dollar volume is likely to push GDP growth above trend in the first half of 2006," Rupkey said.

The OECD's composite leading indicators for July show that the pre-Katrina trend had been strong for the US, rising 0.4 percent. Europe and Japan had also shown improving trends.

News from industry, particularly the chip industry, has also been positive recently. On Thursday, Intel said it "continues to see double-digit year-over-year growth driven primarily by strong demand for notebook PC platforms", Texas Instruments raised its financial targets for the current quarter, citing broad-based demand, and National Semiconductor reported better-than-expected quarterly results and revenue forecast.

Friday, 9 September 2005

More hints on US interest rates

There were more hints on the direction of US interest rates yesterday, although probably less clear than from the day before.

Reuters reported that wholesale inventories fell unexpectedly by 0.1 percent in July while sales rose 0.5 percent, boosted by a 7.6 percent jump in sales of petroleum products. The report, however, questioned whether the dip in inventories means demand is outstripping wholesalers' ability to stock supplies or whether it indicates that wholesalers have doubts about future demand.

In the same report, first-time claims for unemployment insurance benefits were reported to have dropped to 319,000 last week from 320,000 the prior week. This figure included about 10,000 disaster-related applications for aid from hurricane-battered Alabama, Louisiana and Mississippi. The four-week moving average of claims rose for the fourth straight week, climbing to 318,500 from 316,500.

Yesterday also saw the Federal Reserve report that consumer credit increased at an annual rate of 2.5 percent in July. This is slower than the 3.8 percent pace of the second quarter

San Francisco Fed President Janet Yellen's speech yesterday also did not leave a clear message on the direction of monetary policy in the wake of Hurricane Katrina. Nevertheless, William Polley concluded from it that "[m]ore rate hikes are necessary". Similarly, Mark Thoma interprets the speech as "expressing more concern over the potential for inflation than the potential for economic slack".

Unlike the previous day, yesterday saw little in the form of changes in monetary policy in other parts of the world.

The Bank of Japan kept its stimulative monetary policy unchanged even as it said that Japan's economy continues to recover and projected consumer prices to be either zero or show a slight increase towards the end of 2005. Japan's core private-sector machinery orders did fall by a seasonally-adjusted 4.3 percent in July from June, although the fall was less than expected, and actually represents a 10 percent year-on-year increase.

Similarly, the Bank of Korea kept interest rates unchanged, but Governor Park Seung reportedly told reporters that "we will seriously discuss a rate adjustment next month". This is despite the National Statistics Office reporting that its consumer confidence index fell to 94.8 in August.

And, as widely expected, the Bank of England also left interest rates unchanged.

Thursday, 8 September 2005

More interest rate hikes despite Katrina

Yesterday, Reuters reported a number of stories that collectively suggest that, Hurricane Katrina notwithstanding, it looks like the Federal Reserve will continue to raise rates.

The report mentions the Congressional Budget Office's warning on the storm's impact on US GDP.

The CBO said devastation from the hurricane, which ravaged the Gulf Coast and sent gasoline prices soaring, could trim growth in the second half of 2005 by between 0.5 and 1 percentage point and cut employment by 400,000.

It saw both growth and employment rebounding in the first half of next year as the region rebuilds.

The impact on retail sales so far, however, is not clear.

Redbook Research said sales at major retailers in September to date were up 0.2 percent compared with the same span in August and were 3.0 percent on a year-over-year basis for the week ending September 3.

The International Council of Shopping Centers and UBS said that chain store sales were flat last week after dipping 0.3 percent the prior week. Compared with the same week a year ago, sales were up 3.8 percent following a 3.9 percent increase a week earlier.

Other news yesterday tilt the balance towards further rate hikes, for example, the data on productivity and labour costs.

[S]econd-quarter productivity growth was revised to a lower rate, weakening U.S. Treasury bond prices. Investors fear this could fuel inflation and prompt the Federal Reserve to keep raising interest rates despite Katrina's harm...

Growth in output per worker hour in the nonfarm business sector slowed to a 1.8 percent annual rate from the 2.2 percent pace initially reported and the first quarter's 3.2 percent growth pace, Labor Department data showed. Unit labor costs...grew at a 2.5 percent pace versus a 1.3 percent rate initially reported and forecasts for a 1.4 percent gain.

The report also touched on the Federal Reserve's Beige Book:

The Fed...said business activity had picked up cross the country from July through to mid-August. But this assessment, in its regular beige book assessment of the economy by the Fed's 12 regional banks, was based on data culled before Katrina hit.

And perhaps most significant were the comments from Chicago Federal Reserve Bank chief Michael Moskow, more of which were reported here.

The Federal Reserve needs an "appropriate" monetary policy to keep inflation contained at a time the economy has less slack than a year ago, Chicago Fed President Michael Moskow said on Wednesday, hinting at more rate increases ahead.

"I'm concerned about core inflation running at the upper end of the range that I feel is consistent with price stability," Moskow said in a speech to the Futures Industry Association, echoing hawkish comments he made Aug. 24.

Certainly, other central banks have not been afraid to raise rates. The Bank of Canada raised rates yesterday, as did the Bank of Thailand. The Reserve Bank of Australia, though, left interest rates unchanged.

There were data yesterday suggesting that there is enough momentum in the global economy to withstand further rate hikes. For example, German industrial production rose 1.2 percent in July, the third month in four that it has increased. Australia's GDP grew a faster-than-expected 1.3 percent in the second quarter, the fastest pace since the fourth quarter of 2003. And Britain's house prices rose at their fastest rate in almost a year in August as soon as the Bank of England cut interest rates.

However, it is not all clear for the global economy. Japan's recent weakening trend appears to be reinforced by the latest report that its diffusion index of leading economic indicators fell to a break-even 50.0 in July from 66.7 in June.

Wednesday, 7 September 2005

UK economy growing, US and German data upbeat

The UK economy continues to eke out some growth.

The Office for National Statistics (ONS) reported yesterday that manufacturing production rose by 0.1 percent in July. Overall industrial production, however, fell 0.3 percent.

For the service sector, the findings from a quarterly survey of the sector carried out in August by the Confederation of British Industry and accountancy firm Grant Thornton and released today showed that business volume expectations for the coming quarter consumer services were flat, while for business and professional services, the volume of business is expected to slow over the coming quarter.

Nevertheless, the National Institute of Economic and Social Research estimates that the British economy grew by 0.5 percent in the three months to August, up from 0.4 percent in the three months to July.

Elsewhere in the world, there was upbeat news from the US, where the non-manufacturing ISM index rose to 65.0 in August, its highest reading since April 2004, from 60.5 in July, and from Germany, where manufacturing orders rose 3.7 percent in July compared with 2.3 percent in the previous month.

Japan, however, saw household spending fall 3.7 percent in July from a year earlier in price-adjusted real terms and 4.2 percent from June on a seasonally adjusted basis. The Cabinet Office's consumer sentiment index for July, on the other hand, rose 1.5 points from the previous month to 48.1 on an unadjusted basis.

Tuesday, 6 September 2005

Not too much wrong with UK economy

There were further signs of a moderation in the UK economy yesterday, but no indication that it is headed for a serious downturn.

According to the British Retail Consortium, retail sales measured on a like-for-like basis fell 1.0 percent in August compared with a year earlier. However, this is an improvement from July, when sales fell 1.9 percent on the year. Total sales, which include new floorspace, rose 2.9 percent on the year, having risen for most of this year.

Meanwhile, service sector growth in the UK slowed in August, according to the Chartered Institute of Purchasing and Supply/NTC Research's services Business Activity Index, which slipped to 55.2 last month, its weakest in three months, from 56.3 in July. According to Reuters, this is below consensus expectations for a slight fall to 56.0. The index for new business also slipped, to 56.0 from 56.8.

Economists don't seem overly worried about the fall.

"Taken with manufacturing just into expansion territory and construction rising at its fastest rate in over a year, there is not too much wrong with the UK economy," said Geoffrey Dicks, economist at RBS Financial Markets.

Howard Archer at Global Insight acknowledged that "service sector activity is still reasonably healthy", although he still expects the Bank of England to cut interest rates again around November.

The euro zone services PMI also fell, albeit slightly to 53.3 in August, exactly as economists had expected, from 53.5.

Meanwhile, news that China and the EU have signed a deal to end their textile row should also be good news for European retailers.

Saturday, 3 September 2005

US August employment, Asian GDP and trade growth

US non-farm payroll employment increased by less than forecast in August. Reuters reports:

U.S. employers added 169,000 workers to their payrolls last month and the jobless rate fell unexpectedly to 4.9 percent, its lowest level since August 2001, a reminder of the economy's vigor before Hurricane Katrina slammed into the Gulf Coast.

While August's job-creation tally fell slightly short of the 190,000 gain expected by Wall Street, the Labor Department said on Friday job growth in June and July was stronger than previously thought, bumping up the tally for those two months by a combined 44,000.

Job gains in August were broad-based, although factory employment slipped by 14,000 - the third consecutive monthly decline. Over the past year, the manufacturing sector has shed 110,000 workers...

The report showed construction payrolls grew by 25,000 - a figure surely to swell in the months ahead as rebuilding after Katrina gets under way.

The service-side of the economy created 156,000 jobs, spread across most sectors.

Average hourly earnings increased two cents, or 0.1 percent, with the year-on-year reading edging down to a 2.7 percent gain from July's upwardly revised 2.8 percent. The length of the average work week held steady at 33.7 hours.

As with other economic data, Hurricane Katrina will have an impact on upcoming employment data. The survey for the August jobs data had been carried out before the hurricane hit the Gulf Coast.

In economic news out of Asia, South Korea's economic growth picked up momentum in the second quarter, with GDP growing 3.3 percent year-on-year, up from a 2.7 percent gain in the previous quarter, the Bank of Korea (BOK) reported yesterday. In Singapore, private-sector economists have raised their median 2005 growth forecast for Singapore to 4.4 percent from 3.8 percent in the previous poll in June.

In China, the National Development and Reform Commission (NDRC) said the country's exports in July rose 30 percent year-on-year to 65.58 billion dollars -- the lowest monthly increase this year -- while imports increased only 12.7 percent year-on-year. Actual FDI in July fell 4.9 percent from a year ago. The NDRC expects "significant changes" in export growth in the second half of this year or in the first half of next year at the latest.

Friday, 2 September 2005

US consumer spending remains strong but other data less so

Yesterday's economic news provided some indications of a possible economic slowdown, but mixed with some indications of relatively robust growth.

For the US, Reuters reported a fall in auto sales in August.

... Perhaps because the allure of heavy auto promotions had worn off, auto sales for last month proved less robust than July's record. On an annualized basis, sales reported so far added up to about 13.3 million cars, sharply below the 17.16 million sold in July and beneath forecasts for about 14.25 million.

However, Reuters reported that consumer spending was strong in July.

... [A] 1 percent increase in personal consumption...took the U.S. personal saving rate into negative territory. The saving rate...was a negative 0.6 percent, the lowest savings rate since monthly records began in 1959, the Commerce Department said... Personal income advanced 0.3 percent after a 0.5 percent June increase, the Commerce Department said.

The department's measure of consumer inflation advanced 0.3 percent, but the core PCE price index -- which excludes food and energy -- edged up just 0.1 percent, with the year-on-year increase slipping a notch to a 1.8 percent gain.

But not construction spending.

Not only did home sales appear to have reached a peak in mid-summer, but construction spending for July proved flat, confounding forecasts of a 0.5 percent gain.

The same report also mentioned that weekly claims for unemployment insurance rose last week.

Data for last week...showed first-time claims for jobless benefits climbed to 320,000 in the week ended August 27. That was their highest level in two months and up from a revised 317,000 the prior week. A four-week moving average of claims...rose for the third straight week, to 316,750 from 315,500 the previous week.

The report also touched on indications that:

...factory output was already expanding less robustly. The Institute for Supply Management's national manufacturing barometer retreated to 53.6 in August from 56.6 in July.

The Institute for Supply Management has more details on its survey.

Other PMI data provided by NTC Research shows that the euro-zone PMI edged down to 50.4 in August from 50.8 in July, the UK PMI rose to 50.1 from 49.5 while China's PMI "dipped to a series-low of 50.6 in August". Other PMI news included a fall in Australia's by 5.4 points to 43.3 in August, the lowest reading since the monthly survey started in May 2001, but a slight uptick in Singapore's to 52.2 from 52.1 the previous month.

And as another indication that manufacturing isn't doing too badly, semiconductor sales were up in July, although prices declined.

All this, of course, may change with the impact of Hurricane Katrina and new highs in oil prices.

Thursday, 1 September 2005

US GDP revised down to 3.3 percent, outlook weaker

Dark clouds continue to gather over the world economy.

In the US, second quarter GDP growth has been revised down. Reuters reports:

U.S. gross domestic product, a measure of all goods and services produced within U.S. borders, grew at a revised 3.3 percent annual rate in the April-June period after a 3.8 percent first-quarter gain, the Commerce Department said.

In its first snapshot a month ago, the department had put second-quarter growth at 3.4 percent, a figure economists had expected to be nudged up to 3.5 percent.

The report showed businesses built inventories slightly, in contrast to a month ago when inventories were thought to have dropped. Economists said this implied a little less pickup in production ahead for an economy that appears set to take at least a temporary hit from soaring energy prices.

More ominously, the Chicago PMI plunged below 50 in August.

The National Association of Purchasing Management-Chicago business barometer plunged from 63.5 in July to 49.2 in August, its lowest level since April 2003 and the biggest decline in the 37-year history of the indicator.

The new orders component of the index crumbled to 46.5 from from 69.6 in July, its biggest one-month fall ever. The prices paid component rose to 62.9 from 61.3 -- less than some had expected given the recent spike in prices of energy and other commodities... The employment index fell to 51.7 from 56.1 in July.

Europe's latest estimated second quarter GDP growth of 0.3 percent for both the euro-zone and the EU25 shows no change from flash estimates. Euro-zone inflation in August is estimated at 2.1 percent, slightly down from July's 2.2 percent.

The UK saw the GfK's consumer confidence barometer fall to -4 in August from -1 in July. However, on Monday, GfK's index of consumer confidence for Germany had been reported to have risen to 3.4 points from a revised 3.2 the month before. And yesterday came news that unemployment declined in Germany and France, falling by 12,000 in Germany in August and 30,000 in France in July.

And the news coming out of Asia today is also somewhat mixed. South Korean manufacturers' confidence rose to a four-month high in August as an index of manufacturers' expectations for the month ahead stood at 85 compared with 78 in July, but listed companies in China have reported slower profit growth for the first half of 2005 in the face of rising costs.