Chicago barometer rises, eurozone lending declines

The US economic recovery appears to be on track. From Bloomberg:

Companies in the U.S. expanded in December at the fastest pace in almost four years, signaling the economic recovery is gaining speed heading into 2010.

The Institute for Supply Management-Chicago Inc. said today its barometer rose to 60, exceeding the most optimistic estimate of economists surveyed by Bloomberg News and the highest level since January 2006. The gauge, in which readings greater than 50 signal expansion, showed companies boosted production and employment as orders climbed...

Economists projected the Chicago index would drop to 55.1 from 56.1 in November, based on the median estimate of 53 projections in the Bloomberg survey. Forecasts ranged from 52 to 58.5.

However, in Europe, the economic news cast fresh doubts about the durability of the recovery. Again from Bloomberg:

Loans to households and companies in Europe posted their third straight annual decline in November as the economic slump curbed credit demand and made banks more reluctant to lend.

Loans to the private sector fell 0.7 percent from a year earlier after a drop of 0.8 percent in October, the European Central Bank said today. M3 money supply, which the ECB uses as a gauge of future inflation, shrank 0.2 percent in November, the first decline since records began in January 1981, after increasing 0.3 percent in October.

US consumer confidence rises

US consumer confidence continued to rise in December. Bloomberg reports on Tuesday:

Confidence among U.S. consumers improved in December for a second month as Americans grew less concerned about the immediate future, pointing to an economy that will keep expanding into 2010.

The Conference Board’s sentiment index increased to 52.9 in December, in line with the median forecast of economists surveyed by Bloomberg News, according to figures from the New York-based research group today...

The S&P/Case-Shiller index of home prices in 20 U.S. cities rose 0.4 percent in October from the prior month on a seasonally adjusted basis, the group said today. The gauge was down 7.3 percent from October 2008, the smallest year-over-year decline since October 2007.

Confidence is also returning in Europe. From Bloomberg:

Italian business confidence rose to the highest in 18 months in December on expectations by manufacturers that growing exports will boost the economy’s recovery from the worst recession since World War II.

The Isae Institute’s manufacturing sentiment index climbed to 82.6, the highest since June 2008, from a revised 79.4 in November, the Rome-based research center Isae said today. That compared with a median forecast of 79.7 in a Bloomberg News survey of 8 economists...

The rise in confidence in Italy mirrored gains in optimism in Europe’s largest economy. Business confidence in Germany increased to the highest level in 17 months in December as the global recovery supported exports and manufacturing growth, the Munich-based Ifo institute said on Dec. 18.

French business confidence fell in December for the first time in nine months on concern that fading government-stimulus measures may slow the economy’s recovery from its worst slump in six decades, Paris-based statistics office Insee said last week.

However, with a recovering economy, inflation is also returning. Again from Bloomberg:

German consumer prices posted their highest annual gain in eight months in December after energy costs increased.

The inflation rate, calculated using a harmonized European Union method, rose to 0.8 percent from 0.3 percent in November, the Federal Statistics Office in Wiesbaden said today. That’s the highest level since April. Economists predicted prices would increase an annual 0.7 percent, according to the median of 19 forecasts in a Bloomberg News survey. From the previous month, prices rose 0.9 percent.

US holiday retail sales rise

It's turning out to be a cheerful holiday season for US retailers after all, as Bloomberg reports.

U.S. retail sales rose an estimated 3.6 percent this holiday season as online gift-buying, last- minute spending and an extra shopping day spurred a recovery from last year, the worst in four decades.

A jump in purchases the week before Christmas helped year- over-year electronics sales increase 5.9 percent from Nov. 1 to Dec. 24, MasterCard Advisors’ SpendingPulse said in a statement. Jewelry and luxury sales also gained, the research firm said.

Sustained growth in consumer spending could extend the US economic expansion into next year, according to one economist.

The U.S. economy next year will turn in its best performance since 2004 as spending perks up and companies increase investment and hiring, says Dean Maki, the most-accurate forecaster in a Bloomberg News survey.

The world’s largest economy will expand 3.5 percent in 2010, according to Maki, the chief U.S. economist at Barclays Capital Inc. in New York. The rebound in stocks and rising incomes will prompt Americans to do what they do best -- consume, said Maki, a former economist at the Federal Reserve. Faced with dwindling inventories and growing demand, companies will soon become confident the expansion will be sustained, he said...

Maki says central bankers will lift the U.S. overnight bank lending rate target to 0.5 percent in the third quarter, from zero to 0.25 percent currently, and to 1 percent by year- end...

Despite the promising signs for the economy, the Federal Reserve will probably be reluctant to raise rates. But it is apparently preparing for eventual monetary tightening nevertheless.

The Federal Reserve today proposed a program to sell term deposits to banks to help mop up some of the $1 trillion in excess reserves in the U.S. banking system.

The plan, subject to a 30-day comment period, “has no implications for monetary policy decisions in the near term,” the central bank said in a statement released in Washington.

Not so hesitant in raising rates is the Bank of Israel.

The Bank of Israel raised the benchmark interest rate for a third time since the global economy began to recover as growth accelerated and inflation exceeded the government’s target range.

Governor Stanley Fischer increased the lending rate by a quarter of a percentage point to 1.25 percent, the Jerusalem- based central bank said today. Seven of 16 economists surveyed by Bloomberg had predicted the increase, while nine expected no change.

Japanese economy grows despite deflation

Japan reported today that industrial production rose in November, making it very likely that the economy will maintain its expansion in the fourth quarter.

The Ministry of Economy, Trade and Industry reported today that industrial production increased 2.6 percent in November after having increased 0.5 percent the previous month.

The ministry's survey of production forecast showed that production is expected to increase 3.4 percent in December and 1.3 percent in January.

These data indicate that the Japanese economy is likely to grow again in the current quarter for the third consecutive quarter.

Growth in Japan is being maintained despite the fact that the country continues to suffer from deflation. A report last Friday showed that consumer prices fell 0.2 percent in November and were down 1.9 percent from a year ago. Another report today showed that monthly wages declined 2.8 percent from a year ago.

Japan is the only major economy in the world to suffer from deflation though. Despite earlier fears of the financial crisis driving economies into deflation, most other major economies have seen consumer prices resume their uptrends in recent months, thanks to determined stimulative monetary and fiscal policies that have helped these economies to reflate.

Growth in its export markets has in turn helped the Japanese economy. Another report last week showed that exports rose 4.9 percent in November, the biggest increase since November 2002.

That is not to say that Japanese consumers have not done their part. A report last Friday showed that household spending rose 2.2 percent in November from a year ago.

The Japanese government expects the economy to continue growing next year with a little help from the government. On Friday, the Japanese government said that the economy is projected to expand by 1.4 percent in the year starting April 2010 as it approved a record 92.3 trillion yen budget for the next financial year.

So for the moment, Japan's economic expansion looks set to continue.

Japanese unemployment up, government unveils record budget

Like most of the rest of the world, Japan's economy is recovering but remains fragile. From AFP/CNA:

Worries mounted Friday that Japan's economic recovery is running out of steam as data showed the jobless rate rising and deflation continuing to hobble the world's number two economy.

The unemployment rate climbed to 5.2 percent in November from 5.1 percent in October, worsening for the first time in four months, the government said.

Core consumer prices fell 1.7 percent in November from a year earlier, the ninth straight month of drops, fanning worries that deflation could jeopardise a fragile recovery from the worst recession in decades.

Still, other data show that the recovery remains on track.

Household spending rose 2.2 percent in November from a year earlier, beating market expectations for a rise of 0.3 percent, the government reported.

And data earlier this week had also been positive. From the WSJ on Monday:

Japan posted a bigger-than-expected 373.9 billion yen ($4.12 billion) trade surplus in November due to the first rise in exports to Asia in more than a year, helping to ease concerns about the fragility of the country's economic recovery.

Other Japanese government data released Monday showed that the all-industry activity index, a key measures of economic output, rose a seasonally adjusted 1.2% in October from the previous month to mark the first gain in two months.

Nevertheless, the Japanese government is taking no chances. From AFP/CNA:

Japan on Friday unveiled a record trillion-dollar budget for next year despite growing worries about its debt mountain, seeking to revive an economy hit by its worst downturn in decades...

Prime Minister Yukio Hatoyama's three-month-old government approved an unprecedented budget worth 92.3 trillion yen (1.0 trillion dollars) for the next financial year starting in April.

US durable goods orders rise, jobless claims fall

If you're in a festive mood, some positive data on the US economy should be welcome. From Reuters:

The U.S. Commerce Department said on Thursday that durable goods orders excluding transportation rose 2 percent last month, more than reversing October's 0.7 percent drop and beating market expectations for a 1 percent rise.

However, a plunge in orders for civilian aircraft tempered overall orders, which rose only 0.2 percent, below expectations for a 0.5 percent increase.

A separate report from the Labor Department showed initial claims for state unemployment benefits fell 28,000 to 452,000 last week. That was the lowest level since early September 2008. Economists had expected a drop of only 10,000.

"Both of these series point to ongoing healing in the economy," said Robert Dye, senior economist at PNC Financial Services in Pittsburgh. He said the figures suggested economic growth in the fourth quarter would be stronger than had been expected "with a moderate recovery through 2010."

A Merry Christmas to all readers.

US consumer spending recovering

US consumer spending continued to recover in November. From Bloomberg:

American consumers’ spending and incomes climbed in November, indicating the biggest part of the economy is poised to strengthen as the labor market recovers.

Purchases rose 0.5 percent as households took advantage of discounts on autos and electronics, figures from the Commerce Department showed today in Washington. The gain was smaller than anticipated as unseasonably warm weather depressed utility use...

The report also showed incomes climbed 0.4 percent, the biggest increase since May, and inflation cooled. Wages and salaries grew 0.3 percent last month, the biggest gain since April...

The report showed prices stabilized, reflecting discounting by retailers. The Federal Reserve’s preferred price measure, which is tied to spending patterns and excludes food and fuel, was unchanged in November from the previous month, the first time it didn’t increase this year...

Fewer job losses and discounts may be brightening consumers’ moods. The Reuters/University of Michigan final index of consumer sentiment climbed to 72.5, less than anticipated, from 67.4 in November. The figure was lower than the preliminary 73.4 reading, reported on Dec. 11.

Sales of new houses dropped 11 percent to an annual pace of 355,000, lower than the lowest estimate of economists surveyed by Bloomberg News, the other report from the Commerce Department showed. The median sales price decreased 1.9 percent from November 2008.

Based on the November data, US consumer spending has already recovered the high of 2008 in nominal terms, although not in real terms.

US third quarter GDP revised down

US third quarter GDP has been revised lower. MarketWatch reports:

The U.S. economy grew at the fastest pace in two years during the third quarter, but the revised annual growth rate of 2.2% was much slower than what the government initially reported.

U.S. real gross domestic product increased for the first time since the spring of 2008, boosted by higher consumer spending -- especially on autos -- as well as a rebound in investments in homes, a slower pace of inventory reduction, more exports, and robust government spending, the Commerce Department said Tuesday...

The revisions to third-quarter GDP were in three major areas: Business investment, consumer spending, and inventories.

Data on November existing home sales were good. Again from MarketWatch:

Home buyers in November rushed to qualify for what they thought would be an expiring federal tax credit, boosting resales of U.S. homes by 7.4% to a 6.54 million seasonally adjusted annual rate, the National Association of Realtors reported Tuesday.

However, Calculated Risk says that home sales have been distorted by the tax credit and that the November report probably marks the end of the "good" housing news for a while.

Announcement

Due to personal commitments, I will not be posting on this blog over the next two weeks.

ECB announces exit plan amid mixed global economic data

The ECB is winding down its emergency lending programmes. Bloomberg reports on Thursday:

European Central Bank President Jean- Claude Trichet announced plans to scale back emergency lending next year that free policy makers to raise interest rates if needed as the euro region embarks on a “gradual” economic recovery.

Trichet confirmed that this month’s 12-month loans to banks will be the last and said the rate on the loans will be tied to the ECB’s benchmark rather than fixed at 1 percent. Trichet also said the Frankfurt-based central bank will discontinue its six- month loans after March and only guaranteed unlimited funding in its other refinancing operations until April 13.

Economic data on Thursday support the view that the economy's need for support has diminished. From Bloomberg:

Europe’s service and manufacturing industries expanded at the fastest pace in two years in November after a reviving global economy helped the euro region emerge from the worst recession since World War II.

A composite index based on a survey of purchasing managers in both industries in the 16-nation euro area increased to 53.7 from 53 in October, London-based Markit Economics said today in a statement. That was in line with an initial estimate released on Nov. 23 and the highest since November 2007. A reading above 50 indicates expansion...

An index of services rose to 53 from 52.6, Markit said. A gauge of manufacturing increased to 51.2 from 50.7.

Meanwhile, Reuters reports that the eurozone's return to growth in the third quarter has been confirmed.

The European Union's statistics agency confirmed its earlier estimate that the economy of the 16 countries using the euro expanded 0.4 percent quarter-on-quarter in the July-September period, after five quarters of falling output.

Separately, Eurostat said retail sales were unchanged month-on-month and down 1.9 percent year-on-year, below market expectations of a 0.2 percent monthly increase but better than the forecast of a 2.4 percent annual decline.

However, Reuters also reports that the UK service sector's recovery has lost momentum.

The service sector grew more slowly than forecast in November, a purchasing managers' survey showed on Thursday, but economists remained confident the economy would return to growth in the fourth quarter...

The Chartered Institute of Purchasing and Supply/Markit activity index came in at 56.6, the seventh consecutive month above the 50 level that indicates expansion but below October's two-year high of 56.9 and the consensus forecast of 57.0.

The US service sector appears to have done even worse. From Bloomberg:

Service industries in the U.S. unexpectedly contracted in November, contributing to concerns that mounting unemployment will hurt sales.

The Institute for Supply Management’s index of non- manufacturing businesses that make up almost 90 percent of the economy fell to 48.7 from 50.6 in October, according to the Tempe, Arizona-based group. Fifty is the dividing line between expansion and contraction.

However, other data released on Thursday were more encouraging.

... The number of Americans filing first-time claims for unemployment insurance unexpectedly declined by 5,000 to 457,000 in the week ended Nov. 28, the fewest since September 2008, figures from the Labor Department today showed...

A second report from the Labor Department showed worker productivity increased at an 8.1 percent annual rate in the third quarter, the best performance in six years. The improvement helped labor costs fall at a 2.5 percent pace last quarter, capping the biggest 12-month drop in seven years.

US job losses down but housing remains a risk

Wednesday's economic reports show the US economy on a gradual path to recovery. Reuters reports:

According to the ADP Employer Services report on Wednesday, U.S. private employers shed 169,000 jobs in November, down from 195,000 in October. Despite the decline in job losses, the November figure topped economists' median estimate for a loss of 155,000 jobs, according to a Reuters poll...

In another sign that corporate work force cuts are tapering off, the number of planned layoffs at U.S. firms shrank in November to the lowest level in nearly two years, according to a report by global outplacement consultants Challenger, Gray & Christmas Inc.

Employers announced 50,349 planned job cuts in November, the fewest number of planned job cuts since 44,416 in December 2007, according to the report...

The Federal Reserve's overview of the economy on Wednesday was largely positive, but gave it little reason to move off from its ultra-low interest rates designed to stimulate growth.

The Fed, in its Beige Book report, said eight of its 12 districts reported some pick-up in economic activity since the last report on October 21.

The remaining four -- Philadelphia, Cleveland, Richmond and Atlanta -- reported conditions little changed or mixed, the Fed said.

However, a renewed decline in housing remains a threat to the US economy. From Reuters:

The meltdown of the U.S. housing market is not over yet, and home prices will soon start trekking downward again as a flood of foreclosures looms, a well-known economist said on Wednesday.

Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania, said in an interview with Reuters home prices will resume their decline by early next year as foreclosure sales pick up again.

"The housing crash is not over," he said.

A more sanguine view on housing risks is provided by Morgan Stanley's Richard Berner.

Despite recent improvements in housing demand, construction and home prices, housing risks are turning negative immediately ahead. A ‘payback' from the end of the first-time homebuyer tax credit likely will be the main catalyst, and additional negatives involve the interplay among less-favorable demographics, looming foreclosures and rising joblessness. Yet we strongly believe that renewed housing recovery is coming, courtesy of improved affordability, some easing in credit availability, a renewed tax credit and a return to positive employment gains. The upshot: Weakness in demand, activity and prices is likely through year-end, but we still expect modest improvement in 2010 and beyond: A 10% rise in demand and housing activity is still the most likely outcome next year.

RBA hikes rate, BoJ adds liquidity

Yet another rate hike from the Reserve Bank of Australia on Tuesday. AFP/CNA reports:

Australia raised interest rates for an unprecedented third month running Tuesday, announcing a 25 basis points rise to 3.75 per cent as it makes a "gradual recovery" from the financial crisis.

In contrast, a rate hike is far from the minds of BoJ officials. Again from AFP/CNA:

Japan's central bank said Tuesday it would inject 10 trillion yen (114 billion US dollars) in liquidity into financial markets to boost recovery from the country's worst post-war recession.

The Bank of Japan (BoJ) said it "decided to further enhance easy monetary conditions by introducing a new funds-supplying operation," adding it would also hold interest rates at super-low 0.1 percent to fight deflation.

Tuesday's economic reports were generally positive.

Bloomberg reports that manufacturing continued to expand in the US in November.

Manufacturing in the U.S. expanded in November for a fourth consecutive month, propelled by gains in orders and exports that signal growth will be sustained.

The Institute for Supply Management’s manufacturing index fell to 53.6, lower than forecast, from October’s three-year high of 55.7, according to the Tempe, Arizona-based group. Readings above 50 signal expansion...

The number of contracts to buy previously owned homes unexpectedly rose in October as consumers rushed to take advantage of a tax credit that was due to expire, another report today showed.

The index of signed purchase agreements, or pending home sales, climbed 3.7 percent to 114.1 after increasing 6 percent in September, the National Association of Realtors said. The ninth consecutive gain compares with the median forecast of a decline in a Bloomberg News survey of economists...

Construction spending in the U.S. was unchanged in October after declining five straight months, depressed by a drop in commercial projects as office and retail vacancies climbed, a report from the Commerce Department today also showed. Outlays declined on office buildings and commercial projects, while homebuilding increased.

Bloomberg reports that manufacturing also grew in the euro area in November.

Europe’s manufacturing industry grew for a second month in November after the euro-region economy emerged from its worst recession in more than six decades.

An index of manufacturing in the 16-nation euro area rose to 51.2 from 50.7 in October, London-based Markit Economics said today. That was higher than an estimate of 51 released on Nov. 23. The gauge is based on a survey of purchasing managers and a reading above 50 indicates expansion.

Manufacturing growth slowed in the UK though. Reuters reports:

Manufacturing activity fell last month from a near-two-year high set in October, according to the monthly PMI survey from the Chartered Institute of Purchasing and Supply and Markit.

The headline index dropped to 51.8 from 53.4 and new orders fell sharply to 53.0 from 58.0, though both measures remained above the 50-level that separates growth from contraction, where the main index has been for four of the past five months...

Growth in house prices has also slowed since the summer, the monthly survey from mortgage lender Nationwide confirmed. House prices rose by 0.5 percent in November, unchanged from October and well below monthly growth rates of 1 percent or higher between May and September.

There is no sign of slowing yet in China though. From AFP/CNA:

China's manufacturing activity continued to expand in November as rising overseas demand for Chinese goods helped drive the rebound in the world's third-largest economy, a survey showed Tuesday.

The HSBC China Manufacturing PMI, or purchasing managers' index, rose to 55.7 in November from 55.4 in October, the survey showed...

A separate official PMI published by the National Bureau of Statistics showed manufacturing activity was steady at 55.2 in November - the highest since May 2008.

Markets recover amid positive economic data

Predictably, the Dubai stock market plunged on Monday. However, most of the rest of the world appear to have settled down from last week's turbulence. From Bloomberg:

U.S. stocks rose, extending a monthly gain for the Standard & Poor’s 500 Index, as concern eased over a possible default by Dubai World. Oil rallied as a British yacht crew was seized by Iran, while aluminum and zinc led industrial metals higher. Treasuries were little changed.

The S&P 500 added 0.4 percent to 1,095.63 at 4:10 p.m. in New York, as Wells Fargo & Co. and JPMorgan Chase & Co. led financial shares to the steepest advance among 10 groups. U.S. equities erased losses in the final hour as Dubai World said it is in “constructive” initial talks with banks to restructure about $26 billion in debt. The Dollar Index, which gauges the U.S. currency against six major trading partners, lost 0.3 percent and crude oil climbed 1.6 percent.

Economic reports on Monday were generally positive.

Canada's economy returned to growth in the third quarter. Bloomberg reports:

Canada’s economy grew for the first time in four quarters in the July-through-September period, signaling the country’s first recession since 1992 has ended.

Gross domestic product expanded at a 0.4 percent annualized rate in the third quarter, Statistics Canada said today in Ottawa. Economists surveyed by Bloomberg News forecast a 1 percent annualized gain, based on the median of 19 responses. The second-quarter decrease, initially reported at 3.4 percent, was revised to a 3.1 percent annualized drop.

India's economy accelerated in the third quarter. AFP/CNA reports:

India reported its best growth figures in 18 months on Monday as government spending and record low interest rates helped Asia's third-largest economy rebound from the global financial crisis.

The 7.9-per cent expansion in the quarter to September from a year earlier shattered market forecasts and prompted a leading government advisory panel to say India would hike its growth estimate for the financial year to March 2010.

Some indicators in the US are also pointing to an acceleration in economic activity. From Bloomberg:

Business activity in the U.S. unexpectedly accelerated in November as orders climbed, signaling the economic recovery will carry through into 2010.

The Institute for Supply Management-Chicago Inc. said today its barometer rose to 56.1, the highest level since August 2008, from 54.2 the prior month. Readings above 50 signal expansion. Milwaukee and Texas also showed gains in manufacturing, other reports showed.

Meanwhile, in the euro area, inflation is back. Bloomberg reports:

European consumer prices increased for the first time in seven months in November led by energy costs as the economy recovered from the worst slump since World War II.

Prices in the 16-nation euro region rose 0.6 percent from a year earlier after falling 0.1 percent in October, the European Union statistics office in Luxembourg said today. Economists had projected a gain of 0.4 percent, the median of 30 forecasts in a Bloomberg News survey showed.