Economic Recovery in the U.S., Euroland, Japan, and Britain

October 29, 2009

The data from major advanced economies continues to inspire less hope than what China and other developing economies are reporting.

Aspects of the 3.5% rise of U.S. GDP last quarter look too good to last.  Slightly over two-thirds of the increase resulted from consumption of durable goods (much of which reflects the expired cash for clunkers incentives) and rebuilt inventories.  Net exports exerted their biggest quarterly drag on U.S. growth since the third quarter of 2006, a sign that the needed adjustment of current account imbalances has stalled.  Meanwhile, more current data for the housing sector and job layoffs are disappointing.  Jobless insurance claims averaged 526.25K during the latest four weeks to October 24th, still 31.6% above the 400K line of demarcation between a healthy and unhealthy labor market.  This latest four-week average matches what the four weeks to last January 17 produced, when the recession was running full bore.  526.25K is only 5.4% less than what occurred in the four weeks to August 1 roughly three months earlier.  It is apparent from this very slow rate of improvement that job hiring in the U.S. remains at trickle strength and is no match to absorb a continuing heavy rate of layoffs.  The faster rate of drop in outstanding jobless claims is probably overstated by a sizable number of people, who collected previously, are not doing so now, yet remain out of work.  With a very weak labor market, personal consumption cannot sustain its third-quarter pace.

The latest data from the euro area show good progress. Euro zone PMI scores in October are significantly better than those just three months ago.  The services index gained 6.6 points from 45.7 in July to 52.3 in October.  Manufacturing rose 2.8 points to 50.7, and the composite index for both of those areas increased 6.0 points to 53.0, which was close to a two-year high.  Retail PMI’s released this morning broke a streak of sixteen sub-50 readings in a row.  Led by France, the regional bloc’s index improved 2.7 points from 47.3 in July to 50.0 in October.  German unemployment unexpectedly fell for a second straight month in October, and the two-month combined drop of 41K reversed close to 15% of the 282K cyclical increase between October 2008 and August 2009.  Yet another data release today confirmed that a broad-based improvement in mood continued in October.  Overall economic sentiment in Euroland at 86.2 compares to 82.8 in September and was 10.2 points higher than the July reading as well as 21.6 points greater than the low in March.  Consumer confidence has revived five points over the past three months and by 16 points since March, while industrial sector sentiment was nine points higher than in July and 17 points greater than last March.  Finally, industrial orders provide one of the better forward-looking indicators in Euroland, and their level in July-August was 7.1% greater than in 2Q not annualized.  That gain represents an acceleration from the 2Q-over-1Q annualized increase of 5.0%.

 British GDP last quarter turned out much weaker than monthly data had suggested.  Real growth of negative 1.6% at an annualized rate was in the red for a sixth consecutive quarter.  On-year growth, as in the previous quarter, was worse than minus 5% at minus 5.2%.

Japanese industrial production soared 34.7% at an annualized rate between the first and third quarters of this year, and surveys of planned production in October and November suggest another solid increase in the final quarter of the year.  Japan’s index of leading economic indicators had the best diffusion index since September 2005, and the diffusion measure associated with the index of coincident indicators hadn’t been better since mid-2006.

Better recent news from Euroland and Japan comes with a disclaimer.  These economies have been unable to decouple from U.S. trends, and the year ahead is unlikely to be different on this score. Even though the latest data attest to continuing improvement the world’s second and third largest economies, that upward trajectory needs the United States to avoid stumbling.  In this regard, a sharp 5.8% monthly drop in Euroland exports during August is worrisome.  Such wiped out a 4.7% increase during the prior month and left exports in August 0.8% below their level in May, which in turn were 2.6% weaker than their level in March.  In September, Japanese exports dipped 0.8% from September, while imports advanced 1.9%.  It doesn’t help these regions that the euro and yen are 19% and 9% stronger against the dollar now than their March lows.

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



Comments are closed.