Index of Leading Economic Indicators Points to Further Weakening
The Index of Leading Economic Indicators (LEI) rose 0.2% in October after an upwardly revised 0.4% gain in September. From April to October the LEI has dropped at an annual rate of 0.4% and the October reading is the sixth consecutive monthly drop. On a year-to-year basis, the LEI in the fourth quarter (based on the October reading) rose only 0.3% vs. a high of 9.0% in the first quarter of 2004. The year-to-year change in the LEI has decelerated significantly for nearly three years. As chart 1 indicates, based on the year-to-year change in the LEI, economic growth should be slow in the near term. Real GDP of the U.S. economy grew at an annual rate of 1.6% in the third quarter, after gains of 5.6% and 2.6% in the first and second quarters, respectively.
Six of the ten leading economic indicators that make up the LEI increased in October – real money supply, index of consumer expectations, stock prices, average manufacturing hours, new orders for durable consumer goods (projected),and initial jobless claims. The declining components were vendor performance, building permits, orders of non-defense capital goods (projected) and interest rate spread.
Southeast Asia: Will Regional Q3 GDP Reports Suggest A Slowdown In 2007?
This week marks the release of third-quarter GDP reports for four of the major Southeastern Asia economies – Singapore, Hong Kong, Taiwan, and Malaysia – with four more countries slated to release data over the following two weeks. As the year winds down, there is growing speculation about how a period of lower export demand and the effects of past rate hikes will affect the region.
This morning, Singapore’s Q3 GDP report hit the wires, and the results were roughly in line with expectations. Year-over-year GDP expanded by 7.2% compared with an 8.2% rise in Q2, and quarter-on-quarter GDP grew an annualized 5.7% during Q3 after 3.9% annualized growth in Q2. Looking at the economy’s main driver – exports – it is clear to see that while growth is still at a healthy level, the expansion of total exports has slowed since the first quarter. Net exports – according to the recent national accounts data – only grew by S$1 billion over the past year. This low net export tally amounts to a contribution of less than 1.0% to GDP in a country where gross exports are equal to 250% of GDP. As both regional and global demand moderate and export growth slows throughout the region, Singapore’s growth will decelerate in kind. By mid-2007 the Monetary Authority of Singapore could start openly discussing a rethink of monetary policy, but action would be slow and deliberate.
The outlier to the regional trends of slowing growth and higher interest rates has been Indonesia. Year-over-year GDP growth had been decelerating throughout 2005 and into this year, which prompted Bank Indonesia (BI) to start cutting interest rates during the first quarter – a time when virtually the entire region was in tightening mode. In turn, growth has risen, driven both by higher net exports and by rising domestic demand – the latter being supportive of healthy near-term growth. As private consumption rises, BI may go back into tightening mode at some point in 2007, which would also run contrary to the likely regional trend of monetary easing next year.
Between now and the end of the week, GDP reports will be released for Hong Kong (Nov. 21), and for Taiwan and Malaysia (both Nov. 23). In all of these countries we expect a similar theme to play out – growth in exports will slow but still be a primary driver of economic expansion. The area of particular concern to us will be how domestic demand has held up throughout Q3. In the rare cases such as Indonesia where consumption is on the rise and rates are on the decline, we feel secure that the slowdown in global demand will not have a severe impact on the overall economy. For those countries that are raising rates and experiencing a deceleration in domestic demand, however, we will watch closely for signs that slower export growth could drag down the economy and prompt a monetary policy rethink in the near-term. At this moment, Taiwan and Malaysia both seem more vulnerable than Hong Kong, but perhaps this has to do with Hong Kong’s secure position as re-exporter to China as much as it has to do with the relative vulnerabilities of the other countries mentioned. In any case, there are a number of candidates throughout the southeastern Asia region that would feel the pinch from slower export demand, and in the coming weeks the weaker links will become more readily apparent.
