A Few Glimmers of Light

March 30th, 2009 - The global economy is still struggling, and will continue to do so in the first half of the year.  But the newsflow is now somewhat less than unrelentingly bad.  Generally, the data coming out of the US and China represent a few glimmers of light among the darkness, even as Europe and Japan have yet to show more promise.

US retail sales for February fell less than forecast, and the revised rise in January was better than the previous estimate.  However, some of the gains may be attributable to consumers responding to discounting, as firms try to clear inventory.  Also, with unemployment on the rise and house prices still softening, households may not be ready to come out of their foxholes yet.  Still, the University of Michigan’s index of consumer expectations six months from now, edged up slightly.  This is somewhat encouraging, but needs further data support.

Personal consumption expenditure (PCE) growth was also up, though a little softer last month, after rising sharply in January.  Overall, we should expect positive PCE growth in the first quarter.  This represents a significant improvement compared with the sharp declines in the previous two quarters.  However, GDP growth will still be significantly negative in Q1 because of weak investment spending and inventory disinvestment.

Based on recent data, there are indications that the economy will experience a substantial inventory correction in the first three months of the year.  This may weigh on the growth numbers in the first quarter but bodes well for the possibility of a rebound in production in the second half of the year.

The housing market is definitely a focus of attention, partly because of its central role in the crisis but also because, normally, residential investment is one of the first expenditure categories to signal that we are emerging from a recession.  Well, there was some tentative good news from February new home sales.  It rose 4.7 percent over the previous month, even as January and December sales were revised higher.

However, before we get too excited, it should be noted that February sales were actually down a whopping 41.1% from a year earlier.  In addition, this statistic is normally subject to heavy revision.  But generally, expectations are rising that a bottom may be in sight in the housing market this year.  The combined effect of greater home affordability, more-attractive mortgage rates, an expected rebound in the securitisation market, the TALF and security purchases should provide a floor for the housing market.

In summary, the latest set of data depicts an economy that is showing some signs of stabilisation.  It is still in recession, but is no longer deteriorating sharply.  As a result, there has been a modest increase in optimism among observers.  The view that the economy is “falling off a cliff” is being replaced by one that sees it starting to stabilise at a low base.

Of course, we have yet to see a turnaround in leading indicators, such as the important ISM new orders index, which is a prelude to a pickup in manufacturing activity.  But we should not expect this to happen before mid-year.  According to some studies, the stock market stages its rebound several months before leading indicators do so.

As for unemployment, which is a lagging indicator, the total number should go on rising well after the recession has hit bottom.  But the trend of the monthly data is important.  Over the next few months it should be monitored to see if the monthly figure has stabilised and is becoming less negative.  That would be a good sign.

As expected, Chinese exports have fallen sharply.  But there are also encouraging signs that the growth slowdown that the economy is experiencing may not be as bad as the pessimists fear.  Investment spending and bank lending are up, the latter due in part to a diktat from authorities who have a bigger say in these matters than their western counterparts.  In addition, the purchasing managers’ index is showing a healthier trend.

Unfortunately, economies in Europe and Japan have yet to show signs that they are bottoming out.  The Americans have been putting pressure on continental Europe to implement larger stimulus packages, and the Europeans have, thus far, steadfastly refused to comply.

There is a free-rider issue involved.  Countries that do not engage in huge stimulus packages can still benefit from the increased trade effects of those that do, while also minimising future problems resulting from current excessive policy measures.