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Daily Global Commentary

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Factory, Housing, and Construction Spending Reports Send Positive Signals

Tue, Dec 1 2009, 22:21 GMT
by Northern Trust Economic Research Department

Northern Trust

Factory, Housing, and Construction Spending Reports Send Positive Signals

The factory sector continued to grow in November, albeit at a slightly slower pace compared with October. The composite index of the ISM manufacturing survey fell slightly to 53.6 in November from 55.7 in October, which implies that factory activity improved but failed to exceed the pace seen in October. Readings greater than 50 are indicative of an expanding sector. The new orders index (+1.8 to 60.3) rose, while production, supplier deliveries, and inventories indexes declined but continued to hold above 50.0 indicative of growth in November but a slowing vis-à-vis October’s performance. The ISM manufacturing composite index has held above 50.0 for four straight months.

The Pending Home Sales Index (PHSI) of the National Association of Realtors posted the ninth consecutive monthly increase. The PHSI rose 3.7% to 114.1 in October. The PHSI leads sales of existing homes by 1-2 months, implying that the latest data point to continued growth of home sales in November-December period. The $8000 first-time home buyer credit program is strongly responsible for the increase in home sales during the recent month in addition to low mortgage rates.

Construction spending held steady in October after a 1.6% decline in September, previously estimated as a 0.8% increase. Residential construction expenditures rose 4.4% following a 2.0% drop in September. The September decline in construction outlays makes a significant difference as it was originally estimated to have risen 3.8%. The main result is a nearly certain downward revision of third quarter headline real GDP growth rate of 2.8%. The weakness in non-residential construction expenditures is likely to persist for a few more months.

Australia, Japan: A Tale of Two Countries

As the world slowly recovers from the global recession, a few countries have received particular attention for breaking away from the herd of slow but improving economies. In particular, Australia has sprinted ahead, having avoided a technical recession and now more concerned about normalizing interest rates and fighting tomorrow’s inflation, while Japan is coming up lame, struggling to establish self-sustaining growth while its debt piles up and chronic deflation lurks in the shadows. Both had meetings regarding monetary policy today, and those decisions only emphasize how they got where they are now.

The Reserve Bank of Australia (RBA) hiked its official cash rate by 25 basis points to 3.75%, as expected – the third hike in as many meetings. RBA Governor Stevens cited that this hike was a step toward normalizing interest rates from particularly stimulative levels and not an immediate alarm about impending inflation. The Reserve Bank has taken considerable flak in the past for being overly cautious in containing price pressures, but we give credit where it is due. Through the 1997 Asia financial crisis, fallout from the NASDAQ correction and the current global recession, the economy has avoided two consecutive quarters of contraction while prices remain contained. The RBA has accomplished this despite occasional outside pressures for cheaper funds, and has earned a reputation as one of the more respected central banks in the industrialized world (in our humble opinion). Now, when the RBA says that “the economy is in recovery” and “risk of serious economic contraction in Australia having passed,” we feel inclined to trust this opinion, and even expect a further 25bp hike in February.

Conversely there is the parlous state of Japan’s economy. Over Australia’s span of 18 recession-free years, Japan has experienced four separate recessions totalling over eight years collectively, with deflation dominating the picture. The benchmark overnight call rate has not been above 1.00% since June 1995, yet all this cheap money has not rekindled a spark of demand. One has to wonder just what the problem is in this situation.

Today’s emergency Bank of Japan (BoJ) meeting suggests what one key issue is – not that it is the only one. Bank officials gathered today supposedly to find a new way of pouring money into the economy, and announced it would provide up to ¥10 trillion in funds for terms up to three months at the overnight call rate of 0.10%. While the effectiveness of this move will be debated for some time, what has gained particular attention is the supposed political hand behind this emergency meeting and sudden action. BoJ Governor Shirikawa stated specifically that “it was not government pressure that led to the latest decision,” which only fueled further speculation that the new administration is pressing the Bank for action in the run-up to next year’s upper house elections.

If anything separates the Australias from the Japans, it is this factor – political interference. Inasmuch as the RBA has defended its place as an autonomous institution following a specific mandate to maintain low, stable inflation, the BoJ has at times deferred monetary doctrine to political expediency. We are not declaring that today’s decision by the BoJ will be an exercise in futility. Rather, our problem lies more with who actually makes these decisions and how this will affect the BoJ’s credibility. Tokyo has plenty of problems to work through over the next few years – salvaging the central bank’s credibility should not be one of them.

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Published on  Tue, Dec 1 2009, 22:25 GMT