Spotlight Back on Growth

October 15, 2008

I sense a re-shifting focus in the marketplace back to indicators of economic growth.  Previously since the failure of Lehman, the breakdown of the credit markets and flurry of official measures to address banking problems were commanding center-stage.  The slide of global markets, where accrued losses since September 12th total 21.0% on the DJIA, 22.0% on the DAX, 24.6% on the Ftse and 21.8% on the Nikkei, naturally remain an important sideshow, but the direction of causality between stocks and projected growth is now fully two-way.  Fear is now directed at the drumbeat of bad economic indicators that lies ahead.

Qualitatively, it has become fashionable to predict the worst recession in a generation and perhaps since the 1930’s.  Quantitative projections, however, fall well short of the verbal hype.  Quarterly forecasts that I’ve seen typically show a peak-to-trough drop in real U.S. GDP of 1%, more or less.  Such a decrease would be greater than in the last recession, on a par with the downturn in the early 1990’s, but considerably milder than the recessions of 1981-2 and 1973-5, each of which saw GDP slump about 2.5%.  For me, the verbal warnings seem more accurate and appropriate than the numerical representations.  Recessions triggered by the financial sector have typically been deeper than other downturns.  A peak-to-trough drop of at least 2% is not an unreasonable assumption, and negative growth will probably persist longer into next year, if not to 2010, than Street analysts are predicting.  Being a global downturn, the whole decline is apt to be greater than if the business cycle were not so synchronized.

Each day seemingly brings more evidence that policy actions are being implemented too late to avert a global recession.  In Japan, exports edged up only 0.9% between August 2007 and August 2008, down from a 14.1% advance in the previous 12 months, and Japan’s current account surplus in the latest month was 52.5% smaller than a year earlier.  Yen appreciation of 18.5% against the euro and 7.7% against the dollar compared to August averages will dampen export demand additionally.  Japanese industrial production, which fell 2.7% at a seasonally adjusted annual rate (saar) in the first half of 2008, showed even more pronounced weakness in the summer dropping at a rate of 4.7% saar in July-August from the 2Q level.  Capacity utilization in August was 3.5% lower than in July and off 7.9% from August 2007, and inventories shot up 2.5% as a ratio to shipments in July-August from 2Q, heralding more forced production cutbacks.

From continental Europe comes news of a downward reduction in German retail sales volume such that July-August no longer show any rise from 2Q after such plunged 8.4% saar in the second quarter.  The German ZEW expectations index stumbled to -63.0 in October, returning near to July’s cyclical low. The current conditions component worsened by almost 35 points to -35.9.  In France, which is also in recession, business sentiment slumped to 87 in September from 94 in August.  Euroland industrial production was 1.6% lower saar in July-August than on average in the second quarter, setting the stage for a probable larger drop in 3Q than the prior quarter’s 1.9% annualized decline.

British unemployment climbed at a monthly pace of 31.8 thousand, five times faster than the rise during 1H08.  CPI inflation above 5% has not been matched by worker earnings, which decelerated to an on-year advance of 3.2% in August from 4.3% in August 2007.  While that slide heralds good news for the future containment of inflation, the other side of the coin is that it means that real household purchasing power is getting squeezed.  Finally, the main message to take from weaker-than-expected U.S. retail sales in September is that escalating layoffs and the implosion of equity and real estate wealth affected actual consumer discretionary spending, not merely consumer confidence, much more instantaneously than typically happens.  October figures could be brutal.

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