U.S. Review
Green Shoots or Just Weeds?
The recent rebound in the stock market, less overtly bad economic news, and the onset of spring have lots of people reporting sightings of green shoots. Spring always brings a sense of renewal as people gradually end their winter hibernation and come out and take advantage of the better weather.
How much more or less activity is seen as “picking up” is the key to seeing whether this is the start of a self-reinforcing recovery. We remain skeptical but are clearly pleased to see a slightly better tone to the economic and financial data. First quarter real GDP remains on a pace to decline at around a four percent pace.
Actual economic data for the week present a mixed picture of the state of the U.S. economy. Sales of existing homes fell slightly more than expected and about one-half of all sales were either short sales or foreclosure sales. Actual buyers remain in short supply and mortgage applications for the purchase of a home are still depressed. Applications for refinancings have perked up, however, which is creating some economic activity of its own.
Unemployment Is Still Rising
We have long stressed that the most important real-time economic indicator during these troubling times is first-time claims for unemployment insurance. In addition to the weekly first-time claims numbers, the report includes data on continuing claims and the insured unemployment rate. The insured unemployment rate has been rising a tenth of a percentage point a week, which has virtually matched the increase in the unemployment rate. The latest data show the insured unemployment rate up to 4.6 percent, which is the highest it has been since the series began back in 1983. The most recent increases suggest the civilian unemployment rate will rise from 8.5 percent to 8.9 percent in April. Every monthly jump in the unemployment rate causes more and more people to realize that double-digit unemployment remains a high probability. The unemployment rate is known to be a lagging indicator and tends to peak about six months after the recession ends. The past two recessions saw the unemployment rate peak a year or more after the recession officially ended.
Weekly first-time unemployment claims are a leading indicator and there is some sign that the pace of layoffs is leveling off. This past week, which is the survey week for the April employment report, saw claims bounce back by 37,000 to 640,000. The increase follows two weekly declines, the last of which was a large drop during the Passover/Good Friday week. Claims remain slightly below their cycle highs but remain extremely high nonetheless. The most recent reading is consistent with another 650,000 drop in nonfarm payrolls.
The loss of jobs is only part of the story. A larger proportion of job losses today are occurring among full-time workers and reflect permanent cutbacks as opposed to temporary layoffs. In addition, many workers who have avoided layoffs have seen their income cut substantially as hours worked, bonus payments, commissions and other types of incentive compensation have been cut back substantially.
Durable goods orders came in slightly better than expected, but considered in the context of a downward revision to February data, the report was roughly in-line with expectations. Non-defense capital goods orders ex-aircraft came in positive for the second month in a row, suggesting signs of life in business spending.
Adding to the better news in business spending, it appears new home sales are at least stabilizing in the mid 300,000 range. We would not completely rule out further declines from here, but are hopeful that a bottom is forming.
Global Review
U.K. Economy in Dire Straits
Data released this morning showed that real GDP in the United Kingdom plunged at an annualized rate of 7.4 percent in the first quarter of this year relative to the fourth quarter of 2008 (chart at left). Whether measured sequentially or on a year-over-year basis, which was down 4.1 percent, the downturn in real GDP is the worst for the British economy since the dark days of 1979-80.
A detailed breakdown of real GDP in the first quarter into its underlying demand components is not yet available, so it is difficult to say with precision where the sources of weakness are concentrated. However, a preliminary breakdown via industries offers some clues. For starters, industrial production is estimated to have plunged more than 20 percent (annualized rate) in the first quarter, and construction spending was off roughly 10 percent. Output in the services industries appears to have contracted about five percent. The only sectors to have recorded positive growth were agriculture and the government.
Given the nosedive in industrial production, it is likely that exports fell at a double-digit pace yet again. (Exports declined 15 percent in the fourth quarter.) In addition, capex was probably very weak in the first quarter. However, retail spending appears to have held up reasonably well (see top chart). Monthly data show that the volume of retail spending rose 1.0 percent in the first quarter relative to the previous quarter.
So how do we square the sharp decline in production that occurred in the first quarter with the relative resiliency in retail spending? The answer is that a sizeable drop in inventories must have occurred, and this inventory liquidation should eventually lead to stabilization in the British economy later this year. Indeed, some “green shoots” may be appearing. As seen in the middle chart, the purchasing managers’ indices for manufacturing and service sectors both posted decent increases in March. Both indices remain below the demarcation line that separates expansion from contraction, but it appears that the rate of decline may be starting to level out. In addition, some indices of house prices have edged higher recently.
As in the United States, the sharp contraction in the British economy has caused the government’s finances to hemorrhage. Chancellor Darling released his budget numbers this week, and the outlook read like a horror novel. The public-sector borrowing requirement is expected to exceed 12 percent of GDP in 2009-10, a peace-time record. The deficit news contributed to the sell-off this week in the market for British government bonds.
As shown in the bottom chart, the British pound has traded in a fairly narrow range versus the U.S. dollar since the beginning of the year. We project that the British economy will continue to contract over the next two quarters, albeit at slower rates than during the last two quarters. And as we discuss in a recent special report (see “The Global Economy: Who Gets Out of the Gate First?”) we believe the U.S. economy will show signs of stabilizing before most other major economies. Therefore, we look for the dollar to appreciate modestly versus sterling through the end of the year.
