U.S. Review
“Less Bad” Is Good
The recent rebound in the stock market, a less downbeat than feared earnings season, and a few better than expected readings in the economic numbers have raised hopes that we can now see the light at the end of the deep recession tunnel. We hope so. Our fear, however, is that much of the recent improvement merely marks a shift in the rate of deceleration in economic activity. That still marks an improvement but it does not change our view that the recession will drag on through late this year.
For all the new found optimism in the economy this week there was actually very little good economic news to support it. Most reports were merely not as bad as they were in recent months. Activity is still declining, just not as rapidly as it was during the fall and winter months. One notable change, however, is that some of the more leading reports are now improving.
The Empire Manufacturing survey rose nearly 24 points to a negative 14.65 in April. The index still remains solidly in negative territory, however, and suggests cutbacks in the manufacturing sector are lessoning a bit.
Some Leading Indicators Are Showing Signs of Improvement
Within the Empire Survey one of the largest improvements was in the new orders component, which rose to –3.88 from -44.76. There were also sizable improvements in the shipments component and number of employees series. In addition, the number of firms liquidating inventories continued to increase and fewer firms reported that delivery times were shortening. The latest figures are consistent with what you would expect to see in the latter stages of recession and show that, even though conditions remain exceptionally weak, progress is being made.
The Philadelphia Fed’s survey of manufacturing conditions showed similar improvement but to a lesser extent. The general business activity diffusion index rose 10.6 points to -24.4. New orders rose 16.4 points to -24.3. The percentage of firms reporting shorter delivery times also improved and fewer firms reported that they were liquidating inventories. The extent of the improvement, however, was far less than in the Empire Survey and the inventory and employment components remain exceptionally weak.
One of this week’s best reports came from the housing sector. The NAHB/Wells Fargo Housing Market Index rose 5 points to 14 in April, marking its most significant improvement since the housing slump began. The index remains extraordinarily low, however, and few homebuilders could be said to be upbeat. That said, the recently enacted $8,000 tax credit for first-time homebuyers, along with lower mortgage rates, larger than expected tax refunds, and the onset of the peak spring home-buying season; are giving builders some encouragement. Sales are reported to have improved and expectations for future sales have increased. That said, buyer traffic is merely less negative than builders felt it was a month ago.
Another encouraging report is that first-time claims for unemployment insurance declined for the second week in row, tumbling 53,000 in the last week. The drop helped pull the four-week moving average down to 651,000 from its recent high of 659,500. We wish we could buy in to the notion that layoffs have peaked. The latest figures are for the week before Easter, which are extremely hard to seasonally adjust. Continuing unemployment claims rose and the insured unemployment rate rose another tenth of a point to 4.5 percent. The insured unemployment rate has been rising a tenth of a percentage point a week and that has matched up nearly perfectly with the rise in the unemployment rate. The latest figures suggest the unemployment rate will climb to 8.8 or 8.9 percent in April.
Global Review
Any Signs of Hope in Singapore?
Data released this week showed that real GDP in Singapore fell 11.5 percent in the first quarter relative to the same period in 2008. As such, it was the deepest year-over-year contraction on record in the Singaporean economy (official GDP data start in 1975).
A detailed breakdown of GDP into its underlying demand components is not yet available. When the data do become available in another month or so they likely will show that gross exports were a primary reason that GDP fell as sharply as it did. Singapore is one of the most open economies in the world, and the global recession is quickly transmitted to the Lion City. Indeed, monthly trade data show that the volume of Singaporean exports plunged 20 percent in the first quarter (see graph at the top of page 4).
The weakness does not appear to be confined to just the external sector.
Weakness in exports has a knock-on effect on domestic demand via income. For example, longshoremen who lose their jobs spend less in the domestic economy. As shown in the middle chart, retail spending turned down sharply in the first two months of 2009. The drop-off in exports also probably had a negative effect on business fixed investment spending in the first quarter.
However, the worst may be over for the Singaporean economy. As reported previously, the Chinese economy, which has extensive trade ties with Singapore, has shown some signs of acceleration recently. (See “Signs of Stronger Growth in China,” which is posted on our website.) In addition, growth indicators in many other countries are not as negative now as they were a few months ago due, at least in part, to expansionary macroeconomic policies that have been put in place. As the downdraft in global trade becomes less intense, the shock to the Singaporean economy should start to dissipate. In that regard, the value of Singapore’s exports rose nearly 11 percent in March relative to the previous month. Although real GDP could very well contract again in the second quarter, the rate of decline should be smaller than it was in the first quarter.
Because the city-state is such an open economy, the trade-weighted value of the Singapore dollar is the primary target of the Monetary Authority of Singapore (MAS). When the economy was booming and inflation was a problem, the MAS allowed the currency to appreciate on a trade-weighted basis, but it shifted its stance last October to allow zero appreciation. The MAS held a regularly scheduled policy meeting this week and most investors had expected it to sanction a depreciation of the trade-weighted value of the currency going forward due to the depth of the economic slump. A weaker currency would help to stimulate the economy via stronger exports. In the event, the MAS decided to keep its policy unchanged.
Looking forward, we project the Sing dollar will depreciate modestly further versus the U.S. dollar. In our view, the depreciation of the currency vis-à-vis the greenback will be offset by appreciation against some other major currencies such as the Japanese yen and the euro.
