Top 5 Graphs of the Week - 8 May 2010

This week we look at the consumer credit numbers out of the US, continued expansion in US nonfarm payrolls, surprising growth in NZ employment, Australasian trade numbers, and China's PMI for April (and notes on its currency and monetary policy).

1. US consumer credit expands
US consumer credit expanded $2bn in March, against expectations for a -$3bn contraction (and February's -$11.5). The year on year growth rate is starting to turn up now, signaling that the decline in consumer credit may now be over - or at least that a tentative floor has been found. Looking at the breakdown, Non-revolving credit was the source of the growth, while revolving credit declined. This tells you that much of the growth is driven by things like car sales (which included incentives), rather than consumer spending (revolving credit is generally more associated with general consumer spending). So really, the de-leveraging story still stands for now.

2. US nonfarm payrolls
US nonfarm payrolls surprised to the upside with 290k jobs added in April vs consensus 200k, and an upward revised 230k in March. However the 'official' unemployment rate increased to 9.9% from 9.6% due to a surge in the labor force. Census hiring added 66k to the number (48k in March), in a conveniently timed running of the 10-yearly survey. The expansion in payrolls is a welcome respite for the US, following a mass shedding of jobs as the financial crisis hit. The US tends to take it on the chin with jobs; cutting quickly in bad times, but allowing the necessary adjustments to be made.

3. NZ Employment surprise
Another surprise this week was the jump in New Zealand employment numbers, the unemployment rate fell to 6% from a downward revised 7%; with 22k jobs added. I ran more indepth analysis of the release here. The main points to take are that much of the jobs were added in the productive sector, and it shows that after 3 quarters of positive GDP growth, the economy is finally starting to pick up. Job ads are on the rise, and confidence is also increasing. The scene is almost definitely set now for the RBNZ to raise the official cash rate by 25bps to 2.75% in June (but then there are external risks e.g. Europe, that could play into the mix).

4. Australasian trade
Australia released its international trade figures for March this week, and New Zealand the week before. Australia recorded 2 and 3% growth month on month in exports and imports respectively, with its trade deficit widening to -$2.08bn in March vs -$1.7bn in Feb, and consensus for -$2.13bn. Meanwhile New Zealand reported exports rising higher than imports, recording its 3rd surplus in a row as agricultural commodity prices gave a boost to exports; while demand for imports remained low. It's pretty clear on the chart and in the numbers that the trend for exports and imports has been turning the corner in both Australia and New Zealand.

5. China PMI signals further strength
The HSBC PMI was out this week, slipping slightly to 55.4 from 57 in April (and consensus 57); while the official CFLP PMI rose to 55.7 from 55.1 when it was released in the weekend. So both indexes show the outlook for Chinese manufacturing activity is reasonably strong, in spite of a slight hiccup in February; and firmly rebounding since 2008. Of course the obvious implication is that further strength means further chance for overheating, indeed the People's Bank of China increased the required reserve ratio again last weekend by 50bs, and there has been musings that China will alter its exchange rate policy before the June G-20 meetings.

Summary

Some of the key takeaways from this edition are that the US is still seeing its dubious recovery playing through with some aspects of consumer credit creeping up, and employment beginning to expand through a process of normalisation, stimulus effects, and national surveying. As noted in the analysis of the two US PMI indexes, the US economy is seeing a pick up in activity and signs are for more activity, but the elusive sustainable recovery is yet to be seen.

Looking to Australasia, the growth story continues to play out Australia shows continued strength, and expanding trade (and further interest rate increases - another 25bps this week). Meanwhile New Zealand surprised with its employment numbers, suggesting that the economic recovery there could be picking up; New Zealand also recorded further trade surpluses - but mostly due to cyclical factors. The Australasian economies are islands of growth and stability amongst the developed nations.

Meanwhile - and related to the previous two - China shows no sign of slowing down as the PMIs point to further growth in activity. So the obvious questions of whether or not it's overheating, and what should be done arise. With the PBOC taking a gradualist approach of tinkering with the reserve requirements ratio, will it be forced to take bigger moves soon? The next few months could be most revealing in that respect.

Sources
1. US Federal Reserve www.federalreserve.gov
2. US Bureau of Labor Statistics www.bls.gov
3. Statistics NZ www.stats.govt.nz
4. Australian Bureau of Statistics www.abs.gov.au & Statistics NZ www.stats.govt.nz
5. CFLP: www.chinawuliu.com.cn & Markit/HSBC: www.markiteconomics.com

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Top 5 Graphs of the week

In this week's edition there are some key updates from around the globe. First up is a look at US consumer credit, followed by an update on EU unemployment, we then look at some data from the ISM PMI before noting recent policy settings of the Bank of England, and to finish it up there's a review of international trade data for New Zealand and Australia.

While there's no bridging theme for this edition some key points are; credit growth remains weighed down by challenging economic conditions and deleveraging; unemployment is still a problem though it may improve in the near term; activity is picking up in some areas thanks to the inventory cycle; monetary conditions are still very/historically loose, and developed nations are only very slowly seeing a turnaround in trade.

1. US Consumer Credit
The US consumer credit boom continued to unwind in November, dropping off by a record $17.5 billion in November. The drivers of this are likely to be a combination of attrition (due to consumers paying off debt and not replacing it and/or being unable to replace it due to credit availability and tightening of criteria -and- of course the ugly side where the consumer can't/wont repay and the loan gets written off) and falling credit quality/capacity (consumers facing little to no wage growth, higher unemployment, find it difficult to obtain new credit). I suspect the main driver is the attrition factor, driven a lot by the whole "deleveraging" phase as people look to restore balance sheets, and by the bad-debt element. Looking at the chart below, I think it's also interesting to note the proportion of revolving/non revolving loans over time.


2. Euro Area Unemployment Rate
An employment report on the EU showed the unemployment rate there reaching 10%; a level not seen in 11 years. The EU also released statistics confirming Q3 2009 growth of 0.4% q/q (or -4% year on year) last week. The number is lifted by members such as Spain and Ireland who are still in deep financial and economic trouble, as companies are still shedding jobs to try and control costs. The high level of unemployment will weigh on consumer spending and confidence, but at the same time there has been tentative growth signs in the EU, with the likes of Germany and France recording their 2nd in a row quarter of positive growth in Q3 last year. The near term outlook for the EU is for a subdued bounce-back in 2010-11.


3. US ISM Purchasing Managers Index
The core manufacturing PMI index stayed above the 50 point mark and touched levels not seen in years. As the chart below shows, a lot of it is being boosted/driven by a strong recovery in the new orders index which is a leading activity indicator. The ISM PMI is a very useful set of indices at the moment as you can see by cross checking the components that the inventory cycle is very much alive and well. The key is for the short-term impulse of the inventory cycle to flow on to more activity, i.e. a sort of jump start or wind-up for the economy. So watch this index over the next half year for signs of a passing over of the torch from inventory cycle to sustained activity.


4. Bank of England Monetary Policy
The Bank of England met again last week to set policy. As expected they kept the rate at 0.5% and kept the limit for the Asset Purchase Plan at GBP 200 billion. The BoE provide little information in their policy announcements but did mention the following: "The Committee expects the announced programme to take another month to complete. The scale of the programme will be kept under review.". The minutes of the meeting will be release on the 20th of January. This will be an interesting area to watch over the next year or so as activity picks up slowly in the UK, and it could well be that activity will remain very subdued there while inflation increasingly picks up, thanks in part to these monetary conditions.


5. Australasian Trade Stats
Australia released its trade statistics 2 weeks ago and NZ last week. Both countries reported slightly improved trade deficits as imports fell faster than exports. As seen below on a year on year % change basis both economies are still in the bottoming out phase. Both countries would gain strongly if they could boost exports, the trouble is they both tend to be the top of the list for the long side of the carry trade, and thus tend to have strong currencies. On the other hand both countries have strong commodities exposure (Australia more minerals, NZ more soft/agri commodities), and will over time gain from increasing volumes and prices.


Summary
To conclude this update, the charts above and analysis around them should add a little to your overall thinking about the global economy. The comments should lead you to think of some areas to watch that will impact how the recovery unfolds and ultimately how markets will be impacted. For instance monetary conditions remain loose in a lot of places, this has implications for how inflation tracks and around the eventual tightening.

On the inventory cycle there's the key area to watch of whether activity will be sustained after the initial burst. And then there's credit growth (for more on credit see my article on US bank lending), and international trade; credit growth will probably coincide with a more sustainable recovery, and international trade will be a vital element for recovery as well as giving clues to how global imbalances evolve.

Sources:
1. US Federal Reserve http://www.federalreserve.gov/econresdata/releases/statisticsdata.htm
2. Eurostat http://ec.europa.eu/eurostat
3. US ISM http://www.ism.ws/ISMReport/index.cfm
4. Bank of England http://www.bankofengland.co.uk/monetarypolicy/decisions.htm
5. Australian Bureau of Statistics http://abs.gov.au/ & Statistics New Zealand http://stats.govt.nz

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