Welcome to the Muddle Ages of the Recovery

Before diving into the analysis, a theme occurred to me the other day; more and more the economic data from the US is looking confused. There are some parts of the economy that are showing some relatively promising signs e.g. manufacturing, but then there are other parts (e.g. consumers, housing, etc) which say - "you know, this recovery... it's not that great, things are still hard!" And thus we are at the muddle ages of the post-great-recession recovery. And so, I was just looking at the US total bank assets statistics, and there were a few noteworthy standouts in the data:


The first chart is in someways an acknowledgment that there are a few bright patches in the US economy at present. Commercial and Industrial lending is one of the most cyclically sensitive sectors of lending, if you track it over a longer time period on a year on year percentage basis it shows a fairly persistent cyclical ebb and flow. Not to be calling the all clear, but the turning of the (still negative) year on year % change, and pick up in new lending in C&I loans is certainly an interesting data point in the context of my previous comments.


And that's the good part over, you can stop reading now if you're a blind optimist. The above chart is monthly consumer lending, with monthly percent change vs year on year percent change. It's tempting to call a turn on this one by looking at the course of the year on year percent change. But if you look beyond the data and think about what's going on, it's hard to make a case for any credible short term strength in this lending category.


In what is in some ways the antithesis of consumer lending, the US personal savings rate has reversed its decades long downward trend, which for the long term is a good thing. It is things like this that will help bring the coming of the economic renaissance (eventually)... if it can be sustained. But of course a sustained higher personal savings rate will also mean more consolidation of consumer lending, and lackluster short-term consumer spending (and then there's the government sector side of the savings coin...).


Oh and before we finish, real estate lending has continued its downward spiral and with the US housing market going no where fast, personal savings rates on the rise, unemployment still at highs, and consumer confidence still in the doldrums... it's like; "hmm, where to next on the real estate lending front?" It's hard to see any strong near-term drivers of a reversal in this sector; this is where the consolidation really needs to take place, not that there's really a choice. So, once again; welcome to the muddle ages.

Sources
Econ Grapher www.econgrapher.com
US Federal Reserve www.federalreserve.gov

Article source: http://www.econgrapher.com/18aug-muddleages.html

US PMI - Is the double dip approaching?

The US manufacturing PMI came in well under consensus at 56.2 vs an expected 59 even, and down sharply from 59.7 in May. The drop was notably in several key areas e.g. new orders down -7.2 to to 58.5, production down -5.2 to 61.4, and exports down -6 to 56. Though the index is still in expansionary territory the drop is possibly cause for concern.


But the most notable decrease was in the prices index, down 20.5 points to 57, with 18% (vs 5%) reporting lower prices, 50% (vs 35%) reporting prices staying the same, and 32% (vs 60%) reporting higher prices. So on a net basis people are still seeing price rises (32%-18% = 14%). But the data point is interesting on what it may mean, for example it could reflect that price normalisation has run its course (people discounting during the recession to try get business, but now raising prices), it could mean that deflation is on its way, and it could simply mean that things are still tough and that demand growth is not enough to support price increases.

So there's the inflation outlook implications, but then there's also the signaling effect of prices on a demand level or economic activity level. Both of which don't look particularly promising in this light, but of course the June data could just be a blip.


Overall though, the data is pretty disappointing, and adds weight to forecasts for a double dip, or stop-start recovery. But as with the China data out yesterday, the index is still in expansionary territory, and things could just keep chugging along at the same level. This was never going to be a fast recovery, and it was never going to be a straight line recovery - everyone still has a lot of work ahead of them.

Sources
Econ Grapher Analytics www.econgrapher.com
Institute for Supply Management www.ism.ws
US Bureau of Labour Statistics www.bls.gov

Article Source: http://www.econgrapher.com/2july-uspmi.html

3 Tiered Economic Recovery: a Stock Index Survey

Is there a 3 tiered global economic recovery under way? And how might stock market performance look?

The other day I noted in a comment on seeking alpha (an extension of ideas in the latest top 5 graphs article) the possibility for the existence of a 3-tiered global economic recovery. The basic idea is that there are 3 tiers in this recovery, with emerging markets leading (and developing economies following):

1. Emerging Markets
2. Lucky Developed Economies
3. Unlucky Developed Economies

Basically this is simplifying the notion of an uneven recovery down to 3 categories (also could be called fast, medium, and slow). The lucky/unlucky comment is a bit facetious, but it refers to the divergence in prospects between developed economies such as Australia, South Korea, Poland, Canada, and New Zealand; and the older developed economies such as most of Europe, the UK, US, and Japan. While the first tier contains most emerging markets.

This divergence is driven by a number of factors such as existing and new vulnerabilities created by fiscal positions and government borrowing. But it also refers to factors (the lucky part) such as a fundamentally strong economy, and benefit from recovering commodity prices, and to a lesser extent global trade volumes.

Of course there are risks to all 3 tiers, and you only need to look at 2008 to see how correlated things can get, but I reckon the 3 tiers accurately captures the way the recovery will unfold for the various economies: fast growth, average growth, and low growth (or stagnation).

Stock Market Returns
So enough hypothesizing and proselytizing, let's do as the article title suggested; survey the stock market returns of the supposed 3-tiers. First up is Tier 1 - Emerging Markets; the category which is mostly to see the highest growth rate... The Chart below shows (with ETFs used as proxies where I couldn't find index data) tier 1 has been clocking up some pretty high annual returns (chart shows year on year % change on a weekly basis). But of course it's matched with higher volatility. Note the correlations in the past 2 years.


Next up is tier 2. The first thing to note is that returns are generally lower over the past 5 years than tier 1, another notable point is the higher correlation across the period vs tier 1. The generally lower returns relative to tier 1 will in part reflect the dichotomy of growth prospects (or potential growth rate).


Last but not least is the tier 3 economies, the unlucky ones. The bounce back has been and gone by a quick glimpse at the chart below, and the fundamentals tend to support that notion. Within this group there are those such as Japan and the EU, who may be more vulnerable with greater structural issues to deal with; especially in terms of fiscal positions. Also note that returns are generally lower than both tier 1 and 2; reflecting lower yet potential growth rates.


So what? So we can make a few generalizations like tier 1 generally had higher returns and higher volatility, and generally lower correlations prior to the crisis. But once the crisis hit all markets started behaving pretty similarly (to state the obvious). But there are some clues emerging e.g. looking at the tier 1 and 2 charts you can see the beginnings of a decline in correlations, with each market starting to move slightly different to the rest (in contrast to tier3).

So if I were to pick where things might go, I'd say tier 3 markets will generally show low performance in line with low growth prospects, and possibly lower correlations. Tier 1 will likely show the highest returns, but retain its characteristic volatility; and the past will probably look somewhat like the future in that respect. Tier 2, though, may present a more balanced mix of volatility and returns, tier 2 has reasonable growth prospects, and most tier 2 markets possess the desirable traits of developed economies i.e. good legal system, rule of law, democracy, stability, investor protections, etc. In any event this supposed 3-tier recovery concept will be an interesting one to think about as the fragile, gradual, and uneven global recovery unfolds...

Sources
Econ Grapher Analytics www.econgrapher.com
Yahoo Finance (Historical Index Levels) finance.yahoo.com

Article Source: http://www.econgrapher.com/7june-3tieredrecovery.html

US ISM - Manufacturing Takes the Lead

In this article we look at both ISM manufacturing and non-manufacturing indexes and ask "Are there any real indications of a sustainable economic recovery yet?" - with the the obvious implication of the broader economic outlook for the US. As a quick reminder the ISM manufacturing PMI came in at 60.4 (just below consensus 61.0, and above previous 59.6); meanwhile the non-manufacturing index came in at 55.4 (unchanged from March, and below consensus 56.4).

Neither of the headline results were particularly interesting apart from the fact they were both still definitely in expansionary territory. But as you'll soon see, a quick look under the surface reveals some pretty interesting moving parts.


Right, the first thing to note is that new orders shot up from 61.5 to 65.7 (only this time last year it was 47.2), new orders is the leading part of the PMI - it shows how much activity is set to come through the system. It's particularly interesting that the new orders index has stayed so strong for so long - one might expect the easing of the stimulus and inventory cycle effects to start taking a toll pretty soon - but hey, maybe there is some hint of underlying strength starting to show through...

The other interesting line in that chart is the employment sub-index, which has also shown some strength (note the details: 26% say higher employment, only 6% say lower now). The employment index is currently sitting at 58.5 (a reading above 49.8 is generally consistent with expansion of the main employment stats). This aspect also provides some interesting indications in terms of the near term outlook for the US economy.


Moving on to the non-manufacturing index, the results are still positive, but it's clear that the manufacturing sector is accelerating faster. The employment index for the non-manufacturing series is still below 50, but the breakdown is 22% higher vs 17% lower - slimmer margin than the PMI; but still positive. Many are looking for a solid improvement in employment for a recovery to take hold (and this is also probably a pre-requisite to Fed rate hikes), so the signs here are somewhat promising - however this is just one part of the economy, and there are still plenty of risks to the US economic recovery (including external risks!).


The last chart shows the prices indices from both series with the annual change in the Consumer Price Index overlayed (i.e. the main inflation proxy). The point of this is that both price indexes appear to be pretty reliable indicators of headline inflation. The other interesting part is the implications of rising prices: 1. It means that there must be at least some appetite from customers to pay the higher prices, 2. It means that margins may end up improving further (having been assisted by the drop in salary and wage costs - in part driven by the huge job losses seen through the crisis).

So there are some interesting signs coming through in the ISM indices for the manufacturing and non-manufacturing sectors. Sure there are still a lot of significant vulnerabilities in the US economy, and the economic recovery is far from sustainable at this point. But, there are some positive signs in the ISM numbers for April. Indeed it's even tempting to suggest that there are some faint glimmering hints of underlying strength coming through. But again, it's a long hard road to a sustainable economic recovery from here, with many bumps along the way.

Sources
Econ Grapher Analytics www.econgrapher.com
Institute for Supply Management www.ism.ws
Bureau of Labour Statistics www.bls.gov

Article Source: http://www.econgrapher.com/6may-uspmi.html

OECD Economies: GDP Status Check

Where are the OECD economies at in the recovery? In this article we take a unique approach to analyzing the patterns of GDP growth across the OECD economies over the past 12 years. Why? Well for starters it's nearing GDP season (Q1 results will be out soon for a few countries; the UK has already announced its Q1 2010 results). Second, it's useful to occasionally challenge your perceptions about which countries are growing and which aren't. Third, it's a timely status check in terms of the overall recovery across the OECD economies.


The first table shows quarterly GDP growth for the OECD economies that report total GDP (Gross Domestic Product) on a quarterly basis. The economies are ranked by size, and the rules for the heat map are: Green = >0.2% Yellow = >-0.2%<0.2% Orange = <-0.2%. In other words the yellows are where economic growth was pretty much flat, while green indicates growth and orange indicates contraction. The pattern in recent years is unsurprising, but it shows a few standouts that got off lightly during the recession e.g. Poland, Australia, and to a lesser extent Korea. It's also informative to assess the patterns across time.


The second table shows GDP growth on a year over year basis, again with economies ranked by size (this time the rules are similar but with -1%/1% instead of 0.2%) . It's interesting to note that Australia, Poland, and Korea are countries which have left recession on an annual basis, with others like New Zealand, and Luxembourg showing promising signs. Again, eyeballing the history you can see which economies have tended to consistently grow and those that have had more patchy history. You can also see the early 2000 recession, and how it compares to the global financial crisis.

Summary

It is useful and interesting to look at the data from different angles from time to time, because it helps you check your assumptions and beliefs, and it allows you to generate new insights. Some of the questions you can answer by glancing at the tables are: Which economies are growing? Which economies have experienced the most consistent growth? Which economies showed the most strength throughout the crisis? And therefore, which economies might produce the most compelling investment opportunities? The final question can't be fully answered here, but by reviewing the data in a new way, it can begin to be answered.

Sources:
Econ Grapher Analytics www.econgrapher.com
OECD www.oecd.org

Article source: http://www.econgrapher.com/24apr-oecdgdp.html

Existing home sales - on the rise?

Existing home sales - on the rise?
July US existing home sales came in at 5.24 million, up 5.0% month on month and up 7.2% year on year, and higher than the 5m forecast (lower 4.8 m, higher 5.25m). So overall a reasonably positive result, and the chart below shows a distinctive upward monthly trend developing. On the price side the July median price was 178.4k, down -15.1% year on year - so on that basis you would expect a little pick up in volume of sales (think back to elementary economics - supply and demand, price goes down demand goes up - sales go up). In terms of the impact on the wider economy it's pretty good news, it's another sign that the US housing market is on the road to recovery (and remember the housing market crash was basically the catalyst that sparked the entire financial and subsequent real economy crisis). The chart below also shows the closing value of the S&P 500 of each month (plus high/low values). You can see a reasonably similar path for the two - so there may just bee some legs to the recent stock market performance...

UK Prices and Retail Sales - slight improvement?

UK Prices and Retail Sales - slight improvement?
In the last week or so we had UK inflation data and retail sales. The data for both is monthly so it provides a pretty timely update on the economy of the UK. Both figures came in slighlty better than expected.

CPI - CPI came in at the same year on year % change as in June; showing a leveling off after a few falls and slower growth. This could indicate that fears of deflation can be set aside now. Indeed with all the stimulus in the UK and quantitative easing, it could in fact herald a turnaround in inflation outlook.

RPI - RPI is another price indicator index but includes mortgage payments; thus the large drop off we've see in this one is more about falling interest rates; strip that off and you have a similar story to CPI.

Retail Sales - While typically a volatile figure, we've seen a second month with a positive figure both month on month and year on year. Indeed, looking at the index you can see a slight tracking upwards of the line. This could be an early sign of a pick up in activity in the UK... retail sales is usually a good leading indicator so we'll be watching closely for August figures to confirm.


MONTH ON MONTH % CHANGE

YEAR ON YEAR % CHANGE BY MONTH

MONTHLY INDEX VALUES

Nippon nippin' on some GDP growth...

The source of the rising sun apparently found a source of economic growth in Q2 in 2009. It could be interpreted in one of two ways depending on your outlook. On the one hand it could be an end to recession (being the first quarter of economic growth (annualised, seasonally adjusted rate of change from previous quarter) since Q1 08). Indeed it is an interruption to the past 4 quarters of deep recession that has befallen the island nation. But then you can add to that and say that that's all there is - i.e. the proverbial dead cat bounce. It's hard to say with precision without seeing the next few quarters! A brief scan of the numbers shows private residential investment way down, ditto private non-resi investment, but its ok cos public investment spiked up (.....). On a higher level Japan has suffered on export basis with its trade surplus falling a lot... it does seem to be benefiting a little from China however. Anyway at this point all I can say is that Q2's result offers promise - Q3 will offer reality.......

-EconGrapher

EU GDP... V?

Just a slight re-visitation of the previous post... I decided to look at it on a yearly basis; i.e. Q2 09 vs Q208 etc. What came out of the graph works was a decidedly downward trend in growth, with a bit of acceleration in the most recent observations. What this says is that while the quarterly growth recession may look near an end, there's still a wee way to go before things are actually in total looking better. It's like stock prices if you fall from $100 to $50 you need much more than a 50% gain to get back where you came from, and when you're that low it doesn't take much to get what looks like a good gain in % terms.

So not out of the woods yet... if anything (to carry the metaphor) we're almost at the top of the mountain in the woods.. eventually we'll come back down and then get into the woods before we can get out! (though maybe spelunking would bear more apt description than mountaineering!)

-Econ Grapher

EU GDP Quarterly % Change

The EU stats agency put out it's flash report on GDP the other day. GDP came in at -0.1% for the EA16, and -0.3% for the EU27. Now generally it's a bad thing to have negative growth but in this case on the graph it looks like a pulling out of recession. The question is 2-fold... in Q3 do we see positive growth? - probably... but what about thereafter? are we going to see the so-called V shaped recovery or a W shaped recovery. The EU is quite a different breed of cat also, while the "area" as a whole may recover, the damage done in this crisis will linger in many pockets of the EU... a couple of countries have had their GDP reduced by almost a 5th... that is serious stuff. In any case for now we can at least draw some hope form the above chart that some semblance of a V shaped recovery could be underway.

-Econ Grapher