This is the first of a few daily links posts. Here I want to concentrate on the economy in light of the manufacturing data released earlier today. I was on BNN today for the headline show at 12:30 and I said pretty much the same thing I will say here, that the uS is doing well on a relative basis. And this owes not as much to easy monetary policy because the ECB has been almost as easy as the Fed. Really, the dichotomy has been about fiscal.
In the eurozone, austerity has sucked money out of the periphery and added a negative impulse to every euro zone economy via the trade sector. In Britain, where austerity has been less severe but where trade linkages to the continent are still strong, the economy has also been weak, much less so than in Europe, however. In the US, the large continental-sized economy insulates the US from exogenous economic shocks. But even so, fiscal policy has been relatively loose compared to Europe, with the US again running a trillion dollar budget deficit. The fact that the deficit is lower and that jobs are higher than originally estimated (see stories below) tells us that the US economy is doing better than expected and better than the rest. Positive revisions are hallmarks of expansion, not impending doom.
The fiscal cliff is the real near-term concern in the US It is very likely that some sort of fiscal contraction will come out of the wrangling over the US government budget deficit. And this will be a drag on growth. I expect it single-handedly to push the US into recession. But absent the fiscal cliff, recession is not imminent.
What the manufacturing data tell us is exactly this. The US is scraping along the bottom right now. One month’s positive data are not enough to say that anemic growth is over. I expect the US to continue at stall speed with sub-par economic and job growth until the decisive push from the fiscal cliff. Europe is getting worse except in Ireland where the Irish have dealt with the banking crisis early, affording them a to more breathing room than the likes of Spain. But note, that emigration still continues as 15% unemployment in Ireland is indicative of a Depression. Britain is somewhere in between the two.
United States
Calculated Risk: Two Reasons to expect Economic Growth to Increase
Calculated Risk is more bullish on the US economy than I am as he points to the upside from state and local government and housing. I would say, however, that I agree that housing is an upside area, relatively speaking. However, state and local governments will face pension funding pressures that I don’t belive will make GDP figures better.
August construction spending records largest drop in a year | Reuters
Here, residential construction continues apace but government and non-residential construction has not. I think this underscores why I think Calculated Risk is too bullish on the local and government and construction front. Only residential housing is in an unambiguously positive frame, supported by Fed policy. The other areas are not as bullish as CR would have one believe.
End of payroll, Bush tax cuts top U.S. ‘fiscal cliff’ fears: study | Reuters
“If Congress does nothing and the United States plunges off the “fiscal cliff” in three months, taxes would rise for 90 percent of Americans due to automatic increases in income and payroll taxes and a range of other fiscal shocks, said a report issued on Monday.”
Manufacturing in U.S. Expands Unexpectedly as Orders Rise – Bloomberg
It’s not clear how good the numbers are since we are coming off of 3-year lows. But still, this is not consistent with recession. Right now, the US is in the euphoric part of the business cycle, with speculative investment having increased as investors seek higher returns. I don’t believe the US is in a recession or will fall into one except via help from tighter fiscal policy. These numbers show this.
Nearly 400,000 More Jobs Added Than First Thought – Real Time Economics – WSJ
“The Bureau of Labor Statistics on Thursday released an early look at its annual “benchmark revision” of its payroll data. When the preliminary revisions become final early next year, the official data should show that there were 386,000 more jobs in March than previously believed. The private sector did even better, adding 453,000 jobs versus previous estimates.”
Watch house prices, stupid, for US election risk – FT.com
“American households are now deeply entrenched in a “deleveraging” mindset.
Only 49 per cent of households told ASR they have a mortgage (10 percentage points lower than two years ago), and 29 per cent of households are debt-free (10 percentage points higher than two years back). Meanwhile, 70 per cent of households say that the financial crisis changed their attitudes to debt, 32 per cent hope to reduce debt over the next year and another 38 per cent simply do not want to borrow at all.”
U.S. GDP takes big hit from worst drought in 50 years | Economy | News | Financial Post
“U.S. economic growth was much weaker than previously estimated in the second quarter as a drought cut into inventories, setting the platform for an even more sluggish performance in the current quarter against the backdrop of slowing factory activity.
Gross domestic product expanded at a 1.3% annual rate, the slowest pace since the third quarter of 2011 and down from last month’s 1.7% estimate, the Commerce Department said in its final estimate on Thursday.”
Durable-goods orders sink 13.2% in August – Economic Report – MarketWatch
“Even after subtracting the volatile transportation sector, however, orders were weak. Bookings also fell for machinery, computers and primary metals in another sign the U.S. manufacturing sector has softened considerably after a more than two-year hot streak.”
Federal Reserve
Fed can be even more explicit about future policy: Evans | Reuters
“”I think we can do a little better about being explicit about our forward guidance,” said Evans, adding, “I don’t think we’ve done a good enough job describing our attitudes about inflation above 2 percent, or below 2 percent.””
How Bernanke Pulled the Fed His Way – WSJ.com
“Interviews with more than a dozen people involved in the Fed decision, both supporters and opponents, show how Mr. Bernanke won over skeptics to advance his policy—a distinction in a Washington era marked by rancor and gridlock. These people also gave a rare view of the low-key persistence of the former economics professor.”
FT Alphaville » HSBC: Don’t say printing!
“By following the money, we identify five ways Fed purchases are felt by markets and the wider economy: 1) yields on assets targeted by the Fed; 2) use of cash by investors selling to the Fed; 3) bank reserves; 4) economic expectations; and 5) policy expectations. There is no printing of money analogous to 1920s Germany: the Fed is effectively funding its purchase of assets by steering reserves in the banking system in certain directions.”
Britain
UK manufacturing downturn dashes rebound hopes | Business | guardian.co.uk
“The Markit PMI survey for September came in at 48.4, dropping further below 50, the mark that separates expansion from contraction. It fell short of analyst expectations of 49.3, and compares with August’s reading of 49.6.”
Retailers that have collapsed in 2012: in pictures – Telegraph
How many of you can remember favorite retailers that went out of business? I remember plenty, most of which were brought down by leverage that cost them during a recession. Overlevered retailers are a big casualty of economic downturns. The longer a downturn lasts, the more severe it is, the more ‘normal’ retailers get caught up in the savaging.
Europe
BBC News – Eurozone unemployment at fresh high
“Unemployment in the eurozone hit a fresh high of 18.2 million in August, the EU statistics agency has said.
The number out of work rose by 34,000, but after the July data was revised up, it meant the unemployment rate remained stable at a record high of 11.4%.”
Irish manufacturing expands as eurozone is trapped in contraction – Telegraph
“Ireland’s manufacturing PMI hit 51.8 in September, a two-month high and the fifth consecutive period of expansion, while the overall eurozone index remained stuck in contraction at 46.1.”
Analysts Cut Profit 52% as Europe Valuations Hit 2-Year High – Bloomberg
I had seen European shares as worthy of relative value over the US. But the policy dichotomy is so large that, especially given a run up in European shares, you have to be cautious.
Euro region heading for ‘disaster’ amid record unemployment – Telegraph
“The eurozone is heading towards an “economic and social disaster” unless governments and businesses join together to combat record high unemployment in the 17-nation bloc, the European Commission warned on Monday.”
ekathimerini.com | Bad loans climb to record level of 57 bln euros
Nick Malkoutzis tweeted that Spain should keep this in mind. I agree given how low the estimate in the stress tests for additional capital needed for Spanish banks was. Clearly, this figure 60 million euro capital figure for Spanish banks is bogus. It will be much more than that.
Spain’s banks ‘need €59.3bn’ – The Irish Times – Fri, Sep 28, 2012
This number is far too low. It’s simply not credible given the size of the banks, the size of present losses and the size of likely future losses. Note that 49 billion euros of this money is for banks that have already been nationalised. So, in effect, Spain is saying its banks only require 10 billion euros of capital. Do you believe that?
Spain loses capital in July for 13th month | Reuters
“Spain lost billions of euros in capital for a 13th consecutive month in July amid investor fears about its troubled and shrinking economy, although the rate of outflows slowed from the previous month.”
Italy Lowers Econ Forecasts, Keeps 2013 Balanced Budget Goal – WSJ.com
From last week:
“The Italian government Thursday lowered its economic projections through 2013 but insisted it is on track to achieve as promised a balanced budget next year.
Italian gross domestic product should shrink 2.4% this year and 0.2% in 2013, according to a planning document approved by the cabinet Thursday. The previous forecast for next year was 0.5% growth.
The “slightly negative” figure for next year masks an improving trend, as the government expects the euro-zone’s third-largest economy to expand on a quarterly basis from the first three months of 2013.”
International
Global wage arbitrage at work:
“the lowest-ranked workers behind the scenes – plucked primarily from India, the Philippines, Indonesia, Latin America and Jamaica – work eight-month contracts without a single day off (sometimes extended to 10 months or more), earning a fixed wage of around £1.24 an hour, with no tips to top this up. They work a 70 hours per week, and often do extra jobs on top of this, such as cutting hair, cleaning staff cabins and laundry, in order to supplement their income.”
Chinese Industrial Profits Fall 6.2% in Fifth Straight Drop – Bloomberg
“Chinese industrial companies’ profits dropped for a fifth month in August, adding to signs the nation’s economic slowdown is extending into a seventh quarter.
Net income fell 6.2 percent from a year earlier to 381.2 billion yuan ($60.4 billion), the National Bureau of Statistics said today in Beijing. That’s the fastest drop this year and compares with a 5.4 percent decline in July and a 1.7 percent slide in June.”