Outside of US housing, the global economic data are weak
This is a second daily commentary today to give some weight to what’s happening in the US after a slew of European-themed posts. I have three or four topics to cover here and I want to begin with the US economy including some thoughts on the housing market, demand for credit, and the Fed’s policies and regulations. I also want to connect this back to the 2013 variant of the global growth slowdown where Europe is leading the way. I have a bunch of links at the end that highlight most of these issues.
Let’s start with the data coming out of the US. Most of the data is poor, so poor in fact that my timeline for the Fed’s tapering quantitative easing in June and ending it at year end may have to be revised back. Remember, the data was above expectations but has begun lagging a lot. Lots of data came out today: construction, private payrolls, manufacturing, small business credit, and housing. All of the data was weak or below consensus estimates. Only the housing data was robust. As Tim Duy, put it earlier, just a few weeks makes a world of difference.
To be honest, I am starting to get concerned about froth in the US housing market. It really is unbelievable how much house prices are increasing after such an epic housing bust. But, here we are with homebuilders holding lotteries for new builds because demand is so high. And prices are appreciating in every market in the Case Shiller Index, some as much as 23%. When you have 42% of future entry level homebuyers i.e. recent college graduates underemployed and up to their eyeballs in student loans, you do wonder whether the housing situation is becoming detached from reality.
I think you know my view here: fiscal policy has been weak or contractionary and that has put a brake on the real economy. But monetary policy in the US has been extremely loose with zero rates and quantitative easing of Treasuries and mortgage bonds. This has shifted portfolio preferences, increased risk appetite and generally buoyed financial and real assets. The result is an economy with weak wage and job growth but still decent consumer spending growth on the back of the rise in residential property values. I view this policy mix as trickle down economics. I believe it is dangerous and likely to end in a serious credit downturn.
I should also point out that small business in the US has cut borrowing for the third month in a row. The demand and/or availability of credit for this important sector of the economy just isn’t there. And this is where a lot of new jobs could come. So the dichotomy between the weak wage and job growth and frothy equity and house markets is set to continue for the time being.
Note the article below on bank equity capital at too big to fail institutions. The Fed may be pushing for stronger capital requirements. Don’t hold your breath though.
Where the US data tie in globally is via manufacturing. Most of the data in manufacturing points to weak domestic demand in the developed economies and weak export demand for Asian economies. South Korea, Taiwan and Japan all recorded weak export orders in the latest batch of manufacturing PMIs. Ireland, a key country in the euro zone as a bellwether for austerity’s effectiveness, also reported weak export demand due to the downbeat economic situation in the UK and the euro zone. And the US manufacturing PMIs are also weakening along with the rest of the world.
The manufacturing data increasingly tell a tale of a slowdown in global growth. Weaker growth in the US and recession in Europe is met with deep recession in Australian manufacturing and slowing in Asian export manufacturing. In my view this has been developing for some time. As I indicated in February, looking at unadjusted year-on-year growth in the household survey’s measure of employed persons, the US jobs numbers actually peaked in June 2012. The trend in job growth has been weakening since then and is now much weaker than at the June 2012 high. Looking at prior economic cycles, I believe this could still just be a mid-cycle slowdown. However, the breadth of weakness outside the US suggests that something more is happening. And unless we see some policy stimulus on the fiscal side, the potential for outright recession in the US and globally cannot be discounted.
All in all, there is indeed a lot of reason to be concerned. And the interesting bit is that on fiscal policy, where governments have been most conservative, the debate is driven mostly by ideology in my view. I voiced this a week ago when talking about the UK GDP numbers by saying that, “this is really not an economic debate at all. It is a political or philosophical debate about the role of government. All of the figures and economic talk is used to give a veneer of logical empiricism to something which is inherently subjective. What people are really debating is the role and size of government. The debate is political and it is about the limitations of government. Some believe in small government and want to hold government in check at all times, irrespective of the economic circumstances. These individuals are much more likely to support austerity. And it would make sense for them to latch on to Reinhart and Rogoff as the intellectual cover for their political view. Others believe in bigger government and think that an increase in the size of government is not only justifiable but entirely necessary in severe economic downturns because of the vacuum left by the private sector’s deleveraging. And these people are invariably on the other side of the austerity debate.”
Since then, I have seen some commentaries that tend to reinforce my view. Cullen Roche at Pragmatic Capitalism pointed to the same problem in the economics profession. And then Paul Krugman did as well, blaming all of the politicking on ‘the other side’. Just today, Clive Crook came out and called Krugman out on being the political animal that he is in language very reminiscent of what I wrote here. Does it matter though? No. The politics and ideology will continue to drive the fiscal policy debate. And this is what has caused Europe to slide into a depression. However, increasingly, as the situation on the ground deteriorates, policy is changing. I don’t think it will change to full bore fiscal stimulus in Europe, if only because the euro and previous policy positions both limit this. But the move right now is away from austerity and toward growth. Will it be fast enough to prevent the global growth slowdown from becoming a recession? This is the $64 million question. To be continued.
Relevant links below
The politics of economics:
“every single economic school that exists is based largely on promoting some sort of policy agenda. For instance, the Keynesians will almost always respond to an economic problem with “more government spending”. Monetarists will almost always respond to an economic problem with “the Fed can fix that”. Austrians will almost always respond with “the government can’t fix that”. Market Monetarists will always respond with “NGDP Targeting can fix that”. MMTers will almost always respond with “bigger deficits and our government Job Guarantee can fix that”.”
“Krugman says his opponents are motivated by politics. “Am I (and others on my side of the issue) that much smarter than everyone else? No. The key to understanding this is that the anti-Keynesian position is, in essence, political. It’s driven by hostility to active government policy and, in many cases, hostility to any intellectual approach that might make room for government policy.”
Talk about lack of self-awareness. Does Krugman imagine that he isn’t motivated by politics? His own views are equally driven by support for active government policy; in many cases, they are also driven by support for any intellectual approach that might make room for such government policy. Like any politician, he expresses certainty where he knows there is doubt. He’s more than happy to simplify and exaggerate as the cause demands.”
“The key to understanding this is that the anti-Keynesian position is, in essence, political. It’s driven by hostility to active government policy and, in many cases, hostility to any intellectual approach that might make room for government policy. “
US data and events:
“Demand among homebuyers is so high in some parts of the country that builders are holding lotteries to decide who gets to purchase homes in their developments.”
“Federal Reserve officials are weighing a stricter cap on bank leverage , a move that would respond to increasing demands to constrain the riskiness of large lenders.
According to people familiar with the matter, Fed officials have discussed increasing the amount of equity capital banks are required to hold, setting the bar higher than the 3 per cent of assets level agreed internationally.”
“The Thomson Reuters/PayNet Small Business Lending Index, which measures the overall volume of financing to small U.S. companies, fell to 98.5 from an upwardly revised 105.4 in February, PayNet said on Wednesday. PayNet had initially reported the February figure at 101.3.
Business borrowing can point to trends in growth and employment, because when small firms take out loans they generally spend the money on new tools, factories and equipment. Such capital investment can be a prelude to new hiring.”
“The Federal Reserve’s debate over monetary policy could begin to shift away from the prospect of reducing stimulus toward a discussion about doing more, given the signs of economic weakness and slowing inflation.”
“US regulators and lawmakers fear large institutions are still too big to fail”
” there is a fundamental problem with retail bank profitability about which regulators unwisely appear totally unconcerned. Various people have suggested that I am therefore calling for looser regulation. That is a misunderstanding. The issue runs far deeper. Really it calls into question the future of banking as we know it.
Many people would like to return to a supposed “golden age” of banking, when banks were small and local and bank managers were respected pillars of the community with real power to make lending decisions. And I understand their nostalgia. In some ways they are right. We need to restore trust in banking. But should we – or could we – turn back the clock?”
“The FOMC statement should shift to indicate the softer economy and falling inflation numbers; I am watching for how much emphasis they place on the latter as a signal as to the likelihood of easing further in future meetings. Like most, I don’t anticipate an expansion of the program at this juncture. I doubt the FOMC would see the current data as justifying a leap from thinking about ending the program to expanding the program just six weeks later. It would be interesting if Kansas City Federal Reserve President Esther George pulls her dissent. Her objection has been that the Fed’s policy stance risks financial stability for little economic benefit. Pulling her dissent in response to falling inflation would signal that disinflation concerns run deep in the FOMC.”
“Construction spending dropped to a seven-month low in March as public outlays recorded their largest drop since 2006, which could cause the first-quarter economic growth estimate to be trimmed.
Construction spending fell 1.7 percent to an annual rate of $856.72 billion, the lowest level since August, the Commerce Department said on Wednesday. Spending had increased 1.5 percent in February.
Economists polled by Reuters had expected construction spending to rise 0.7 percent in March.”
“The Institute for Supply Management (ISM) said its index of national factory activity fell to 50.7 from 51.3 in March, coming in below expectations for 50.9.
A reading above 50 indicates expansion.
In a sign of potential resiliency, the forward-looking new orders component edged up to 52.3 from 51.4, while production improved to 53.5 from 52.2.
But employment fell to 50.2 from 54.2, boding poorly for the Labor Department’s national unemployment report due on Friday.”
“Morgan Stanley has firmly joined the “Where’s the beef?” crowd when it comes to America’s supposed factory renaissance.
In a 125-page “blue paper,” the bank concludes there’s “little real evidence” of a revival. Some domestic producers will certainly benefit from the dual force of breakthroughs in domestic energy production and rising costs in China. But not so fast, says the bank. “Outside of the chemicals sector, low natural gas prices will likely have limited ramifications on capacity decisions.””
“US private sector job growth in April was the slowest in seven months, signalling slowing momentum in the country’s labour market and broader economy ahead of Friday’s labour department jobs report.
Businesses hired a net 119,000 workers last month, according to data released on Wednesday by ADP, the payroll processor. Economists surveyed by Bloomberg had forecast a much higher level of 155,000 following March’s downwardly revised 131,000.”
“Financial data firm Markit said its final Manufacturing Purchasing Managers Index (PMI) slipped to 52.1 from 54.6 in March. It was the lowest final reading since October.
Still, that was a slight improvement from the preliminary reading of 52. A reading above 50 indicates expansion.
The output index fell to 53.7 from 56.6, while new orders dropped to 51.5 from 55.4. The employment gauge showed expansion but fell to its lowest level since November.”
“Asked about the hunger strike, the former constitutional law professor in the White House expressed the proper moral outrage at holding so many men “in no-man’s land in perpetuity.” But it sounded as though he didn’t fully understand his own policy.
Closing Guantánamo doesn’t address the fundamental problem of rights. Obama’s solution, blocked by Congress, is to move the hornet’s nest to a Supermax prison in Illinois — dubbed “Gitmo North” — and keep holding men as POWs in a war that has no end. They’re not hunger-striking for a change in scenery.
It’s true that Congress put restrictions on transfers of individuals to other countries with bad security situations. But, since 2012, Congress has granted authority to the secretary of defense to waive those restrictions on a case-by-case basis. The administration hasn’t made use of that power once. So it’s a little stale to blame Congress at this point.”
“Many volatility traders are math nerds like Saiers, who cut their teeth on Wall Street trading derivatives or working on quantitative trading desks. Others come from the options pits or were specialists in statistical arbitrage.
But one thing all volatility traders abhor is calm markets.
“This is an environment to hit singles and doubles as opposed to home runs,” said Joshua Thimons, a portfolio manager with the PIMCO Multi-Asset Volatility Offshore Fund, which the Newport Beach, California-based investment firm launched in 2011.”
Global data and events:
“Manufacturing activity contracted significantly in April as conditions weakened amid a strong Australian dollar, intense import competition, high energy costs and weak local confidence.
The Australian Industry Group Australian Performance of Manufacturing Index (Australian PMI®) fell 7.7 points to 36.7 on a seasonally adjusted basis. (Readings below 50 indicate a contraction in activity with the distance from 50 indicative of the strength of the decrease.)
This is the lowest level the Australian PMI® has recorded since May 2009, with many of the key sub-indexes also dropping to levels not seen since 2009. The three-month moving average in April fell to 42.2 points from 43.4 points in March.”
“The Markit/CIPS Manufacturing Purchasing Managers’ Index (PMI) rose to 49.8 last month. A reading above 50 indicates growth.
Last week, GDP figures showed that manufacturing output fell by 0.3% in the first quarter.
Manufacturing accounts for about 10.5% of the UK economy.
Analysts said the data suggested the manufacturing sector was strengthening.”
“Growth in China’s manufacturing sector unexpectedly slowed in April, with the official purchasing managers’ index (PMI) falling to 50.6 from March’s 11-month high of 50.9 as new export orders and input prices contracted, data showed on Wednesday.
The outcome was lower than market expectations in a Reuters poll of 51.0, but figure from the National Bureau of Statistics showed the PMI has stayed above the watershed mark of 50, which separates expansion from contraction compared with a month earlier, for seven straight months.
A subindex measuring new orders fell to 51.7 in April from 52.3 in March, while new export orders swung into contraction, falling to 48.6 from 50.9 in March.”
“British house prices dipped unexpectedly in April from the previous month but a recent extension to the government’s cheap credit scheme should buoy the market in coming months, according to Nationwide.”
“Canada’s manufacturing activity eked out the smallest of expansions in April after shrinking in March but the sector did see an encouraging rise in new orders from abroad, according to data released on Wednesday.
The RBC Canadian Manufacturing Purchasing Managers’ Index was at 50.1 last month after adjusting for seasonal variation, up from 49.3 in March. A reading above 50 represents expansion, while a number below means contraction.”
“Robert Fico said he was part of a growing group of anti-austerity government leaders.
“It is not possible at the same to consolidate, to cut public finances and to expect that the government will have enough resources to support economic growth and fight the unemployment rate,” he said.
Under the previous centre-right coalition administration led by Iveta Radicova, Slovakia became a poster-child for belt-tightening – her government slashed benefits and public sector salaries, driving the deficit down from a high of 8 per cent of gross domestic product in 2009 to 4.3 per cent last year, all while keeping taxes low.
But Mr Fico led his leftwing Smer party to an unprecedented victory in last year’s parliamentary elections, largely on pledges of undoing the policies of austerity and economic liberalism promoted by the former conservative coalition.”
“Further signs of a slowdown in the world economy emerged on Wednesday after manufacturing and trade data pointed to a weakening in global demand.
Data on the Chinese, Australian and Korean economies added to concerns that growth in the second quarter will disappoint. However, manufacturing activity in the UK and Japan – both countries that have seen their currencies weaken – picked up on the back of stronger demand for their exports.
Chris Williamson, chief economist at data firm Markit, said: “While the global manufacturing economy is stalling, those countries benefiting from weaker currencies are seeing conditions improve.”
Data out of the US did not get off to a good start on Wednesday either, as figures from ADP Research Institute showed a 119,000 rise in employment, much lower than the 150,000 economists had forecast and the slowest increase since September.”
“But the second straight month of declining manufacturing activity, coupled with declining export orders, suggests it may prove difficult for Ireland to continue to recover from its economic crisis while much of the euro zone is in contraction.
At 48.0, the Irish manufacturing purchasing managers’ index is below the threshold of 50 separating contraction from expansion, and marks the sharpest decline in activity since September 2011, Markit Economics and NCB Stockbrokers said. It has slipped from 48.6 posted in March and 51.5 in February.
Ireland’s manufacturing sector had already broken a long winning streak, posting its first contraction for 13 months in March.”
“After taking the new stock sale into account, Deutsche Bank trades for only about 61 percent of book value, which tells you investors still don’t trust the lender’s balance sheet. This is understandable. For example: Deutsche Bank said 32.8 billion euros of its financial assets as of March 31 were of the illiquid, hard-to-value “Level 3” variety, meaning “the fair value cannot be determined directly by reference to market-observable information.” That’s equivalent to a majority of Deutsche Bank’s equity.
Deutsche Bank shouldn’t stop here: It should raise more equity — a lot more. Let’s hope today’s rising shares will serve as encouragement. A safer, stronger bank is a more valuable one.”