U.S. Review
Still A Great Deal Of Uncertainty
Any hopes the U.S. presidential election would provide the financial markets a little more certainty and stability were laid to rest this week as volatility returned. After a solid Election Day rally, the stock market staged one of its largest two-day declines ever. Apparently investors are still using rallies to reduce exposure to the U.S. equity market.
Uncertainty and pessimism about the near-term economic outlook also increased. The source of this week’s pessimism was another string of weak reports, including both of the ISM surveys, factory orders and monthly chain store sales.
The ISM manufacturing survey plunged 4.6 points to 38.9 in October, which marks the lowest reading for this key series in 26 years. All the major components, including production, new orders, and employment fell sharply and remain well-below the key 50.0 breakeven level. The ISM survey measures the breadth of economic strength and weakness in the economy. A reading below 50 means more firms report conditions are weakening in the factory sector. Broadening economic weakness is a key characteristic of a recession.
Reports Point To More Weakness
The weaker ISM manufacturing report followed similarly weak reports from regional purchasing managers’ surveys, including Chicago, Detroit and Milwaukee. In addition, the factory orders report for September came in much weaker than expected, thanks largely to a huge 5.5 percent drop in orders for nondurable goods. This report was a bit of a head-fake, however. Most of the weakness was in orders for petroleum and coal products which tumbled 16.9 percent. The problem there was that Hurricane Ike caused many refineries to be shut down in September. The net result is that we will likely get a slightly stronger-than-expected factory orders report next month. But there is no mistaking the trend in the factory sector has taken a decided turn for the worse.
The ISM non-manufacturing survey also fell sharply in October, with the composite index falling 5.8 points to 44.4. New orders and employment both fell meaningfully during the month, with orders tumbling 6.8 points to 44.0 and employment 2.7 points to 41.2. The weaker employment series, along with the weaker employment data in the manufacturing survey, are key ingredients in many employment forecasts and raised concerns that job losses in this Friday’s employment report would be worse than feared.
The weak ISM non-manufacturing data were reinforced by generally disappointing sales figures from the nation’s major chain stores. The ICSC reported that same-store sales plunged 1 percent in October to one of their weakest readings ever. Most of the weakness was at major department stores and specialty chains. A handful of discount stores saw sales increase. Consumers have clearly turned more cautious, which means this holiday season should prove to be a major disappointment.
The actual unemployment claims numbers have not been as bad as many had feared. Weekly first-time unemployment claims fell by 4,000 in the latest week and have been hanging around the 480,000 level. The data still point to a deteriorating labor market but nowhere near as much as the survey data from the ISM reports.
The October employment report was a disaster. While job losses in October of 240,000 did not reach some of the worst estimates for the month, the previous two months saw a net revision of -179,000. This brings the total job losses for the year to more than 1.1 million jobs. Job losses continue to accelerate in construction and manufacturing, while even the normally stable service sector has seen employment decline over the past year. We expect job losses will continue through next year and the unemployment rate may exceed eight percent by early 2010.
Global Review
The Hundred Year Storm
Fresh signs of continued turmoil in the world’s financial markets prompted a wave of rate cuts from foreign central banks this week as financial leaders re-assess their outlook. The prevailing theme in the global economy has been a gradual realization that the economic crisis is worse than many had feared.
The Bank of England (BoE) moved decisively to address the situation by slashing its bank rate by 150 basis points – the largest cut for the BoE since 1981. The Bank’s official statement explained that “since mid-September, the global banking system has experienced its most serious disruption for almost a century.” In addition to troubles in the banking sector, signs of further deterioration in the British economy manifested themselves this week as well. The Purchasing Managers’ Index (PMI) for manufacturing came in at 41.5, and the PMI for construction came in at 37.8; both PMIs are at levels that would suggest recession has taken hold.
The European Central Bank (ECB) cut its lending rate by 50 basis points to 3.25 percent. ECB President Trichet described “the intensification and broadening of the financial market turmoil” and lamented the fact that “tensions increasingly spill over from the financial sector to the real economy and from advanced economies to emerging market economies.”
The Reserve Bank of Australia cut its target rate by another 75 basis points this week. Australia’s central bank has now cut rates by a full two percentage points since the summer, and we expect further easing in monetary policy is on the way.
As discussed in the U.S. section, the American job market has gone from bad to worse. However, the labor market report in Canada posted another month of surprisingly-solid gains. The economy gained 9,500 jobs in October, though the unemployment rate ticked higher to 6.2 percent. The consensus was expecting a decline in payrolls on the heels of September’s record gain. In our view, the recent strength in Canada’s reported numbers seems unsustainable against the backdrop of a broad global recession. The Bank of Canada, which has cut its policy rate by 75 basis points in the past month, will likely ease further in the months ahead as the deepening U.S. recession depresses Canadian exports.
Slowing Global Growth
In our conference call last week, “The Global Economic Outlook: Is Global Recession Imminent?”, we announced downward revisions to our forecast. We made these revisions in light of the unprecedented credit market dislocations in the wake of the Lehman Brothers bankruptcy. On Thursday of this week, the International Monetary Fund (IMF) announced that it was cutting its already-bearish forecast even further. The IMF is now calling for global growth to slow to 2.2 percent next year. That would be less than half the rate at which it grew last year and a significant downward revision to its call for 3.0 percent growth just a month ago. In the same report, the IMF also ratcheted down its forecast for GDP growth in advanced economies to a negative 0.3 percent in 2009. This would be the first negative annual GDP figure for advanced economies since the second world war.
