Accelerating recovery in the US, Spain and Britain
The economic data out of the US, Spain and Britain yesterday were very good and support the idea that all three of these economies are seeing recoveries that are accelerating. Some thoughts on the data below
Let’s start in the US where we saw two different manufacturing PMIs and auto data. The Markit data were the best and most indicative of the accelerating pattern we are seeing in the real economy. US manufacturing in June expanded at the fastest rate since May 2010. The final reading for June was 57.3, where 50 signals expansion. In terms of forward and coincident subindices, the output subindex rose to 61 from 59.6 and new orders rose tom61.2 from 58.8 in May. These are the highest readings on both subindices since April 2010. Everything in this dataset is positive and we should expect the employment data coming out of the US this month to reflect this.
In the second PMI dataset, ISM had the manufacturing PMI at 55.3, slightly lower than last month’s 55.4. But the subindices were mixed here. Employment was unchanged at 52.8, despite expectations for a rise to 53.2 and production fell to 60 from 61. However, new orders rose to 58.9 from 56.9 in May. Overall, I would rate these data as being bullish for the US economy, though less robust than Markit’s survey.
Finally, data for US sales of most of the major automakers beat expectations. Particularly notable was GM due to the crushingly negative news flow associated with safety and recalls. Sales at General Motors rose 1 percent, despite analyst expectations for GM’s sales to fall 6%.
Overall, the picture we are seeing is employment growth now of 200,000 to 300,000 per month. Strong output and new order numbers in manufacturing and middling increases in personal income and wages. I believe this supports 3%+ growth for Q2 and Q3 but no more than 2% growth on average due to the lack of wage growth and weakness we have seen in retail sales as a result. Personal spending rose 0.2% in May from April, according to the Commerce Department. But the rise, coming after a flat reading in April, was linked to higher prices. Adjusted for inflation, spending actually dipped. And this is the Q2 data that is supposed to get us to 3%+ growth. It is the huge output numbers on both ISMs that are going to get us there, not the end domestic demand or exports, which were weak according to the ISM survey.
I am not concerned about inflation in this context, except to the degree it retards spending due to low wage and income growth. And I might add that the low interest rate environment makes income growth even weaker by reducing household interest income. The composite picture is a bit of a muddle through one with the caveats that growth is accelerating, data are subject to mean reversion and secular challenges in terms of demographics, private debt and policy space remain.
In Spain, where I am generally bullish, I noted yesterday that the PMI was the highest reading in seven years. This is no fluke and it is no basing effect because the other Eurozone PMIs outside of Ireland were weak, with all of the major economies contracting. Spain has a long, tough slog ahead and could still fall prey to debt deflation. However, I believe the export sector is more competitive, both the services and manufacturing sectors are coming back, interest rates are lower, and the basing effect will support growth as well. Overall, if you have to be bullish on any countries in the Eurozone, it would have to be Spain and Ireland for many of the same reasons they outperformed pre-crisis. The difference now is that the policy space is more limited and the growth levels will be more muted. If Spain avoids restrictive fiscal policy, it will continue to outperform and I am still predicting that Spain’s growth for 2014 will exceed Germany’s.
The UK’s growth is the best in the developed world. Here are a few data points:
- UK manufacturing is in the 16th month of expansion. Markit’s PMI is at 57.5, the 2nd highest level in 40 months.
- Inflation is tame after years of sub-inflation level wage growth. Grocery prices are rising at the slowest rate in 8 years. Inflation is at a 5-year low.
- House prices in the UK are coming back. London house prices are up 18.5% year-on-year according to the Land Registry.
- Lending to first time homebuyers is now increasing. In London it was up 50% in May.
- Retail sales are up. In April they were up 6.9% year-on-year, the best performance in a decade.
None of the data out of the UK are bad. All of it is showing acceleration. Indeed, analysts are raising expectations for 2014 growth in the UK. In April, the IMF raised its growth estimate to 2.9% from 2.4% in January. The IMF also expects 2.5% growth in 2015. In May, the OECD upgraded the UK growth forecast in 2014 to 3.2% compared to a 2.2% average in the OECD. The upgrade from 2.4% in November was the largest upgrade in the G7. And on Monday, Goldman Sachs raised expectations to 3.4% in 2014 and 3% in 2015 from 3.0% and 2.7% respectively. Meanwhile the Fed is slashing US growth forecasts due to the extraordinarily deep Q1 fall in GDP. SO the UK is on the up and up.
What’s more is that, with inflation receding, there is even a 30-40% chance that annual inflation will dip below 1% by year end according to Goldman Sachs. That means there is no pressure on the Bank of England to raise rates. And indeed, this is where the Achilles heel of the British economy lies. There is a clear sign of overheating in property, at least in the Southeast around London. 18.5% growth in one year is not normal. The Bank of England thinks it can use macroprudential regulation to rein this in. It has instituted caps on household mortgage debt to income levels. The question is whether this will be enough to prevent overheating.
In the era we are now leaving behind, the thinking about inflation was influenced by the 1970s where we saw so-called cost-push inflation reach extraordinary levels, especially in the UK. As a result, central banks have made consumer price inflation a central focus of monetary policy. In the case of the ECB, it is the primary mandate. But what we now should realize is that asset-price inflation – especially when fuelled by private debt accumulation – is the most pernicious form of inflation. It masks underlying weakness in consumer demand and can leave a wake of debt, malinvestment and credit writedowns in its wake. As we enter a period of serious demographic challenges, where weak domestic demand growth is the norm in the G7, Japan is the model. Allowing asset price inflation to occur even in the face of weak and declining consumer price inflation is not an option, especially if household or business debt is increasing.
Overall, though, on a cyclical basis, the UK, the US and Spain are three economies that I believe will continue to grow at an above average pace through 2014.