Top 5 Economics Graphs of the Week - 20 August 2010

This week we look at the Q2 GDP results for Japan and Taiwan; getting a gauge on how these two key Asian economies are tracking in their recoveries. Then onto the US where we look first at the industrial production results, which are a tad paradoxical, and then at the PPI stats which may be pointing to margin compression. Then we wrap-up with a view on Euro zone inflation.

1. Japan GDP
Japan's economy grew at an annualized rate of 0.4% (basically flat), well below median forecasts for about 2.3%, and Q1 revised rate of 4.4%. The Japanese economy was also reported as dropping behind China to the world's 3rd largest economy (which is pretty much just a technicality in confirming a foregone conclusion). The Japanese economy was held back by slowing export growth and subdued consumption, as phase 2 of the recovery sets in (i.e. the muddle ages). So Japan will keep muddling on, the key sensitivities for Japan continue to be international trade (and therefore the currency), and on a related note; the resilience of the Chinese economy.


2. Taiwan GDP
Taiwan's economy grew 12.53% year on year in the June quarter, slower than 13.71% in Q1 but higher than consensus estimates for 10.5%. The great rebound is just about run its course in Taiwan. The Taiwanese economy which is also closely linked to the fortunes of global trade, and its neighbor to the north (Zhong Guo); which is currently undergoing a managed slowdown. The policy factors are also playing into the picture as the central bank in Taiwan normalises monetary policy (with a few small hikes expected into the second half of 2010), as well as fiscal policy normalisation, with the authorities keen to keep government debt below the 40% debt to GNP ceiling.

3. Industrial Production
The US released its industrial production figures for July this week, with production rising 1.0% month on month; ahead of consensus 0.6%, and previous 0.1%. On an annual basis industrial production rose 7.7% off of the lows of the earlier stages of the recession, decelerating slightly off 8.2% in June. Capacity utilisation also climbed to 74.8% from 74.1% in June. Looking at the chart below you can see the path of some of the other major economies; China's trucking along, Japan's super-volatile, and the EU/US are playing catch-up since the depths of the recession. The trend marks a dissonance in the US economic scene, as business investment and manufacturing is a bright spot, whereas the consumer is a dark spot; if the US can build up exports it may lead to a happier ending...

4. US PPI
US Headline PPI rose 4.1% year on year, and core (taking off the more volatile food & energy components) rose 1.5%. The movements in prices here reflect some of the signals from the PMI prices sub-index which has been riding relatively high for a few months; however as is notable from the relatively more static and subdued CPI inflation metrics, the price increases aren't getting passed through to the consumer (which makes sense given the competitive environment, and economic environment), so this may mean a bit of margin compression... especially as capacity utilization (normalization) results in eventual reversals of the purge of labor costs during the recession. So this recent positive bout of corporate earnings could be somewhat short-lived as demand is relatively lackluster and potential pressure on the cost side also puts a double hit on margins.

5. EU CPI
Euro zone inflation increased in July to 1.7% from 1.4% in June on an annual basis for the Euro area, and 2.1% from 1.9% for the EU. However in the month of July inflation was actually negative compared to the previous month. The results tentatively point to a stabilisation or even turning of inflation, but as the ECB noted in its recent statement, "inflation rates should remain moderate overall, benefiting from low domestic price pressures". And so, the EU will likely also just keep muddling along, with no significant price inflation; but... remember the EU is actually a collection of economies, which will all be tracking along at their own unique pace e.g. the powerhouse Germany vs the others like Greece.

Summary

So we saw a tapering off of growth in both Japan and Taiwan, two key Asian economies that saw a strong bounce back in GDP following their emergence from the depths of the crisis. And looking forward, the risks are similar for them both; they are both very sensitive to the course of the global economy due to their dependence on international trade, but of the two, Taiwan has less problems and seemingly a better policy position.

Then onto the US we saw industrial production tracking along well; providing some positive (albeit dichotomous) signs as the consumption paradox unwinds. There was also the potential early warning in PPI that margin pressure may increase for US corporates in the medium term. Keeping with large developed economies and inflation; the EU inflation picture is unfolding much as the growth picture is; just muddling along.

Sources
1. OECD Statistics Database stats.oecd.org
2. Taiwan Statistics eng.stat.gov.tw
3. Trading Economics www.tradingeconomics.com
4. US Bureau of Labor Statistics www.bls.gov
5. Eurostat epp.eurostat.ec.europa.eu

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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

Top 5 Graphs: US Sees Positive Signs, But How Real Are They?

This week we look at the US trade balance trending back to normal, US CPI/inflation figures tending sideways, a pick up in US retail sales, further improvement in US industrial production, and a slight tapering off of US consumer sentiment. So the focus is completely on the US this week which is fitting given our update on the Chinese economy a few days ago following their big economic data release. So this week you've got the top 5 graphs for the 2 biggest economies.

1. US Trade Balance - trending back to normal
The US trade balance figure came in at -$39.7 billion for February, slightly worse than consensus of -$39 billion, and worse than January's -$37.3 billion; and much worse than -$27 billion in Feb 2009. However, as bad as it is to have these imbalances, and as much as the US needs to really turn this around for a more sustainable recovery, this is actually somewhat of a positive figure. Though much of the increase was related to oil imports, there was also increase the non-oil aspects, so that reflects an improvement in demand (though likely still related to inventory cycle). This one will be interesting to watch if the Chinese change the yuan policy - will it get worse? or will spending react? The answer to both is probably yes - but with different timing.

2. US Consumer Price Index - inflation taking a breather
The CPI index grew 2.3% y/y, sending headline inflation basically sideways; while core inflation fell further to 1.1%. How to read this part of the cycle is that things are basically taking a breather. My take is that this is a short period of consolidation before an eventual picking up in inflationary forces. There are a few leading indicators pointing to an increase in inflation, and stimulatory conditions from monetary and fiscal policy - compared with potentially redundant capacity will eventually see this picking up again. The yuan policy again will be a wild card for this - a significant increase might even see price inflation driven up by higher import costs.

3. US Retail Sales - growing good, but...
US retail sales grew 1.6% month on month in March; greater than the expected 1.2% and previous 0.5% growth; placing it up 7.1% year over year. Stripping out Autos it was up 0.6% vs expected 0.5% and previous 0.8%. The key message is that there is some strength going on in US consumer spending at the moment. And though on absolute terms retail sales are still below trend, they are making some progress towards a return to trend. What this says in some sense is that there seems to be evidence of a cyclical recovery coming through - it's not necessarily a good thing to see US consumer spending picking up; because the US consumer on average doesn't save enough. If this trend continues then it will just be a back to normal recovery; leaving the same vulnerabilities in place.

4. US Industrial Production - manufacturing expands
Unsurprisingly US industrial production further expanded in March. On a month over month basis it crept up only 0.1% (consensus was for 0.8%), vs Feb 0.1%. However year over year it picked up to 4% (-12.5% in 2009) from 2.2% in Feb. So there is some comparison bias in the yearly figures, but the strengthening does line up with other things, for example in the chart below ISM manufacturing PMI is overlayed and both indicators are consistent with expansion in US manufacturing (what's left of it). Much of this will be related to inventory building, but some may be related to increased consumer spending and export demand (e.g. China).

5. Reuters/University of Michigan US Consumer Sentiment - tapering off
Consumer sentiment came in at 69.5 well off consensus 75 and previous 73.6, but unremarkably up from 63 in April last year. Granted this is only the mid-month update, it does send some warning signs; especially for those who may be expecting a big rise in April payrolls (maybe unlikely given indications from this). The biggest drop was from expectations (62.3 vs Mar 67.9), but current conditions also fell (80.7 vs 82.4). Even eyeballing the chart below shows a trend of tapering off after a period of recovery. The main message is that the recovery is there, but it's not strong and there are risks, and of course - as we see now in consumer sentiment; it may be quite stop-start in nature.

Summary
So where does this leave us? Let's re-cap: there's a worsening trade balance which is mostly due to oil but reflects a little increase in demand; there's inflation basically going sideways or consolidating but with risks to the upside; there's consumer spending showing a marked pick-up but how strong remains to be seen; industrial production is improving but probably still mostly due to inventory building but maybe some iota of fundamental strength; and consumer sentiment is tapering off a bit showing people are still perhaps a little confused about where things are going.

These messages are all pretty much consistent with a fragile and artificially stimulated recovery that most agree is underway. There is a pretty high probability that the recovery wont be structural, rather it will be cyclical (back to normal). Inflation will eventually pick up again, and consumers will go back to their old habits. So in the end, as noted, there are positive signs, but are they really all that positive?

Sources:
Econ Grapher Analytics www.econgrapher.com
Trading Economics www.tradingeconomics.com
US Bureau of Labour Statistics www.bls.gov
Reuters/Univesity of Michigan customers.reuters.com
US Census Department www.census.gov

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