U.S. Economy Contracting Less Sharply Than Euroland Economy

March 4, 2009

Euroland and the United States each experienced a faster drop in service-sector and overall activity last month than in February.  However, the second derivative depicted in the columns labeled “spread” below indicates relative U.S. improvement for a third consecutive month.  The United States has not enjoyed an advantage as great as now in more than a year and a half.  Spreads with a positive sign indicate advantage United States, and those with a negative sign convey advantage Euroland.  The service-sector spread rose 7.5 points from minus 5.1 in November to +2.4 three months later.  The factory sector spread, based on data released Monday, climbed 4.7 points from -2.4 in October to +2.3 last month.  The 4.7 sum of the two spreads last month was 10.8 points more advantageous to the United States than the minus 6.1 spread a year earlier.  Back then, the Fed but nobody else was cutting its interest rates by leaps and bounds.  The Fed funds rate was slashed by 125 basis points to 3.0% in two steps eight days apart in late January 2008, long before anyone imagined how much worse the financial crisis would become.

The dollar was at its 2009 high against the euro this morning.  Recent dollar strength reflects a risk aversion play.  If, for example, U.S. non-farm payroll jobs are reported down by more than 750K in February tomorrow, that is by more than projected, the dollar is likely to advance based on recent behavior.  Currency markets are said to be decoupled from economic fundamentals, wherein a bad employment figure would likely be associated with dollar weakness.  However, the table below suggests that economic fundamentals are indeed getting reflected in dollar movement.  The U.S. economy is in deep recession, with real GDP falling last quarter at a similar rate to GDP in the euro area.  But fundamental economic momentum has become more dollar supportive in 2009. Both regions will record another quarter of very sharp contraction, but Europe’s decline will probably turn out more severe than the U.S. drop.

  U.S. Ezone   U.S. Ezone   Sum of
  Services Services Spread Mf’g Mf’g Spread Spreads
Feb 2008 49.7 52.3 -2.6 48.8 52.3 -3.5 -6.1
March 49.9 51.6 -1.7 49.0 52.0 -3.0 -4.7
April 51.9 52.0 -0.1 48.6 50.7 -2.1 -2.2
May 51.2 50.6 +0.6 49.3 50.6 -1.3 -0.7
June 48.8 49.1 -0.3 49.5 49.2 +0.3 0.0
July 49.6 48.3 +1.3 49.5 47.4 +2.1 +3.4
August 50.4 48.5 +1.9 49.3 47.6 +2.1 +4.0
Sept 50.0 48.4 1.6 43.4 45.0 -1.6 0.0
October 44.6 45.8 -1.2 38.7 41.1 -2.4 -3.6
November 37.4 42.5 -5.1 36.6 35.6 +1.0 -4.1
December 40.1 42.1 -2.0 32.9 33.9 -1.0 -3.0
Jan 2009 42.9 42.2 +0.7 35.6 34.4 +1.2 +1.9
Feb 41.6 39.2 +2.4 35.8 33.5 +2.3 +4.7

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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