Economic data are increasingly pointing to an imminent global recession.
In the United States, the Economic Cycle Research Institute reported on Friday that its Weekly Leading Index for the US economy fell to 122.2 in the week ending 16 September from 122.8 the previous week. The annualised growth rate fell to minus 6.7 from minus 6.1. These are readings that, in the past, have often been associated with recessions.
A day earlier, though, another leading index had provided a less pessimistic signal. The Conference Board reported on Thursday that its Leading Economic Index for the US increased 0.3 percent in August after having risen 0.6 percent in July.
Even here, however, the message was not unambiguously positive. The increase over the six months to August was 2.4 percent, down from 4.0 percent in the previous six months. Furthermore, only four of the ten indicators contributed positively to the index in August while six contributed negatively. The biggest positive contributor by far was real money supply but, as I pointed out in "No QE3 for now", this indicator has been a poor leading indicator of the economy in recent years.
Economic data from Europe were also negative. A flash estimate of purchasing managers indices from Markit Economics last week showed that eurozone economies may already be contracting. The composite PMI came in at 49.2 in September, down from 50.7 in August and below the 50.0 mark that indicates no change in the level of activity. Both the manufacturing and services sectors contracted, the manufacturing PMI falling to 48.4 in September from 49.0 in August and the services PMI falling to 49.1 from 51.5.
Even supposedly fast-growing China may be contracting. The flash estimate of HSBC's manufacturing purchasing managers index for China fell to 49.4 in September from 49.9 in August.
Meanwhile, investors certainly seem to be losing confidence. Markets performed poorly last week.
Stock markets around the world fell. The Standard & Poor's 500 Index dropped 6.5 percent to 1,136.43 last week, the Stoxx Europe 600 Index dropped 6.1 percent to 216.19 and the MSCI Asia Pacific Index dropped 7.1 percent to 111.73. Asian stock markets have fallen 20.7 percent since 2 May and joined their European counterparts in bear market territory last week.
Commodities also suffered last week. The Thomson Reuters/Jefferies CRB Index fell 8.4 percent to 301.87 over the week. Gold, a safe haven from risk aversion in recent years, did not escape this time, falling 9.7 percent over the week and 5.9 percent on Friday alone to settle at $1.639.80 an ounce.
Investors' confidence depends much on developments over the European sovereign debt situation. The latter has deteriorated again recently, with Greek two-year note yields surging almost 15 percentage points to 69.7 percent last week. The 10-year yield rose 2.4 percentage points to 23.6 percent.
Contagion was clearly in the minds of investors. In Italy, the third largest economy in the euro area, the 2-year yield rose 9 basis points to 4.25 percent last week while the 10-yield rose 12 basis points to 5.63 percent despite indications that the European Central Bank was buying Italian bonds.
Meanwhile, the yields for safe-haven bonds were moving in the opposite direction. German 10-year yields dropped 11 basis points last week to 1.75 percent while US 10-year Treasury yields fell 18 basis points to 1.82 percent.
Not surprisingly, meetings held over the weekend by the International Monetary Fund and the Group of 20 were focused on the European sovereign debt problem. Much was discussed, including the bolstering of the European Financial Stability Facility that had been set up to lend to countries facing difficulties in raising funds. It remains to be seen, though, what concrete actions will actually be taken to resolve the crisis.
While policy-makers in Europe struggle to contain the sovereign debt problem, however, the recent data are showing that global economic growth may already be fading.
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