Sunday, August 9, 2009

Economics 09/08/2009: Calling a turning point?

Forward looking update: I am working on detailed analysis of the latest ECB data on banks activity survey across the Eurozone, plus Ireland's own Earnings and Labour Costs data for Q4 2008... posts will be coming on these two, so stay tuned.

Now, I am skeptical about the 'Green Shoots' theory primarily for two reasons:
  1. Relative to current fundamentals, the markets (equities) are overbought and bonds are at extremely low yields. Two possible scenarios can unfold from here on: Scenario 1 = we get growth in the US in Q3 2009, through Q4 2009 and inflation in Q1 2010. This means preciously little for Europe and Japan. Scenario 2 = we get growth in the US in Q3, then a contraction in Q4, and then out of a recession in Q1-Q2 2010 - a 'correction in the middle' scenario. Inflation will rise in Q2 2010 then. Again, Europe lagging and Japan is stagnating. Either way - I believe inflation is coming and it will be very hard hitting - 5%+ in 2010 as a peak, then up to double digits in 2011. Someone will have to pay for all this cash sloshing around courtesy of the Fed.
  2. Real fundamentals - unemployment, personal disposable income, investment and so forth - bar the Government spending and printing presses - are still in a fall.
Now, I am much more comfortable with 6-months scenario of seeing the return to growth - albeit to moderate growth at the very best (especially when it comes to Europe). Here, we have Composite Leading Indicators from the OECD that do a decent job tracking trend (but not inflections necessarily) pointing to some interesting things. That said, I would be not as upbeat as OECD in interpreting these results...

  • June 2009 data points to stronger signs of improvement in the economic outlook of OECD economies compared with June.
  • Strongest recovery signals in Italy and France and clearer signals of troughs in Canada, Germany, the United Kingdom and the United States.
  • In Japan tentative signs of improvement have also emerged.
  • Troughs can also be observed in China and India, with tentative trough signals now appearing in Brazil and Russia.
TOk, let's take a look:

  • CLI for the OECD area increased by 1.2 point in June 2009 but was 5.0 points lower than in June 2008. Now, note that in the previous recession, the CLI signal as about 1.5 years ahead of actual growth...
  • The CLI for the United States increased by 1.3 point in June but was 7.2 points lower than a year ago. The same accuracy for CLI here as in the case of OECD (above) and Euroarea (below) when it comes to timing growth return... Now, note that the US has much better data available than the rest of the world, and here, things are really all over the place. Unemployment is down to 9.4%, but on the back of massive exits from the labour force. Structural unemployment has actually worsened: the number of people out of work longer than six months soared by a record 584,000 to 5 million, accounting for more than a third of all unemployment for the first time on record (chart below). While unemployment fell by 267,000 to 14.5 million, employment fell by 155,000. The labor force declined by 422,000, which means per Marketwatch, "the jobless rate declined because people dropped out of the work force, not because they got jobs". The participation rate fell from 65.7% to 65.5%. Unemployment chart below:There are some signs of improvement on jobs front, however. The average work week rose to 33.1 hours after falling to a record-low 33 hours in June. The average work week in manufacturing (a key leading indicator) rose from 39.5 hours to 39.8 hours. Total hours worked in the private-sector were unchanged. Good news, but one has to put this into perspective - a rise of 0.1 hour on a record low? Average hourly earnings rose by 3 cents, or 0.2%, to $18.56. Even better news, but again - state and local taxes are rising... Disposable income is singing the blues still. Higher working hours might see increased industrial production in Q3. Of 271 industries, 30.1% were hiring on net in July, up from 28.6% in June. In manufacturing, 22.3% of industries were hiring, the highest percentage since September.

  • The Euro area’s CLI increased by 1.5 point in June but stood 1.6 points lower than a year ago. Now, that sounds misleading - as in - we are closer to trend than the US or OECD... true, but the problem, of course is that our trend is soo low, it would be considered a majour downturn for the US economy to run at our long term growth rates...
  • Oh and take a look at Japan - the sickest economy in the universe. Now, note that those years above 100 - that was actually pure stagnation. Yet, CLI still gunned for growth there.
  • The CLI for the United Kingdom increased by 1.1 point in June 2009 but was 0.9 point lower than a year ago. The UK is much closer to a recovery, unless, of course we have a double dip as in 2000-2003...
  • The CLI for Germany increased by 1.7 point in June but was 6.6 points lower than a year ago. To be honest, there is no way the CLI for Germany can stay off the rising path from now on - the sheer collapse of exporting activity there was so deep earlier this year, you would have to put those Germans through another world war to get any worse destruction of productive capacity than we saw. So is CLI really meaningful here at all? And then, spot that double dip in previous episode.
  • The CLIs for France and Italy, after having increased by 1.4 and 2.2 points respectively in June, are now above the level reached a year ago, by 2.7 points in the case of France and 4.8 points in the case of Italy. Well, France is appearing to do just fine here - national consumption-driven economy (as opposed to the German exporting model) is underpinning more stability in the downside part of the cycle. There is also massive spending by the French government on everything under the sun. But the question is - are we in a double-dip here? Once stimulus runs out, and assuming the Germans are not going to stand by and watch the French issuing more debt in their name, something will have to give. It won't be a devaluation of the Euro, and it won't be unionised wages. And it certainly won't be Sarko cutting his populist spending sprees... Now, Italy is to Europe what Japan is to the world, so frankly, after 30 years of disastrous growth, who cares that Italy is in a 'recovery'? Can they themselves even notice that they are? Without Berlusconi trumpeting around Rome about his super-human manly and stately powers? I'll check in 10 days and will report from there...

So here we are.
  • In my view, we can call a global recession turning point somewhere around now;
  • But the meaning of this statement is hollow unless there is a return to real growth - not the corrective 3-4% for half-a-year and then 1% for the rest of our lives, but 3-5% trend - and this is unlikely, especially given the necessary therapy we will have to undergo to cure inflationary hangover of Obama-nomics, Brownist Monetarism and Trichetisation of the Euro;
  • Individually, the US is probably past the turning point now and is accelerating rapidly (though the risk of a double dip, in y view is somewhere around 30% now);
  • UK is also past the turning point and probability of a double dip is also around 30%;
  • Euroarea is not going to see real growth for years to come and probability of a double dip is around 40%.
The CLI for China increased 1.4 point in June 2009 but was 3.7 points lower than a year ago. The CLI for India increased by 1.2 point in June 2009 but was 3.4 points lower than in June 2008. The CLI for Russia increased by 1.2 point in June but was 17.7 points lower than a year ago. In June 2009 the CLI for Brazil increased by 0.4 point but was 11.4 points lower than a year ago. So BRICs are for now decoupling from each other and there is possibility that a new bubble is forming in equity markets in Brazil and Russia...

Happy hunting.


artied said...

Greetings, Constantin.

Inflation in the US - will it be exported or will the dollar decline??


John Pardway said...

I expect a dollar crisis in late 2010 or early 2011. I think the Fed will have to raise interest rates much sooner than it wants to.

John Pardway said...

I mean late 2009 or early 2010.