Since October I have been saying that the US growth was probably going to decline for the remainder of this business cycle. In contrast, I have believed Europe would recover ever since data last June confirmed a broad based phase shift across the entire eurozone from worsening data to better data. The most recent data confirm this pattern becoming well entrenched. Some thoughts below
Themes for today:
Commodities: soybean prices could fall due to increased supply. This would be troublesome for Argentina.
Emerging markets: Of the fragile five, India is looking better, Brazil is still a big concern.
Developed Markets: House price inflation makes France, the UK, Australia and Canada vulnerable to real economy shocks.
US: Consumers are only supporting 1-2% growth. Q1 will be weak. Inventory builds are still the big story.
It was interesting to see the US markets follow through yesterday to the upside after a monster rally in shares when the Fed tapered large scale asset purchases on Wednesday. But rather than seeing strength in this, I see vulnerability because the move to the upside is directly at odds with the news flow and the fundamentals.
Yesterday, the FOMC decided to reduce the pace of its large scale asset purchase program from $85 billion per month to $75 billion per month. The Fed has long wanted to taper its LSAP program and move to forward guidance to normalize policy but the data weren’t strong enough. Ben Bernanke pulled off this transition in masterful fashion, setting the stage for more market upside. Headwinds are building though. Building inventories, earnings disappointments and a lack of wage growth are my principal concerns.
In spite of some relatively strong economic data coming out of the US, risks to near-term growth remain. One of those risks comes from higher than expected inventory build. We saw this come through in the latest GDP numbers.
I am not a bull, largely because I have concerns about the long-term sustainability of today’s policy mix in Europe and the United States and the rise in equity multiples. But it is undeniable that we are seeing a more bullish outlook for the global economy at present. Below are some thoughts about the outlook in the context of today’s upward revision in US GDP figures.
The release of the first estimate of Q3 GDP was initially met with excitement as the headline print of 2.82% growth was far in excess of consensus estimates of 2.0%. Unfortunately, the euphoria quickly faded as the details painted a much more dismal story
By Sober Look As discussed earlier (see post), US manufacturing data for November shows shrinking inventories. This is true for both the ISM survey … ISM Inventories index (source: ISM) as well as the Markit PMI index: US Markit PMI Inventories Index (orange line, source: JPMorgan) Goldman looks at the change in private inventories (also called “inventory investment”) as a […]
Retail sales are at recessionary levels right now, having dropped for a third consecutive month. I need to flag the inventories data that came out this morning in the US as the only thing between us and outright recession.
Although the overall reported headline rate for the GDP remained essentially unchanged, the numbers reflected somewhat weaker consumer contributions and anemic “real final sales”.
The Bureau of Economic Analysis’ (BEA) first (“Advance”) estimate of the annualized growth rate of the first quarter 2011 U.S. Gross Domestic Product (GDP) was 1.75%, down significantly from the 3.11% growth rate reported for the fourth quarter of 2010. When compared to the prior quarter the lower growth was caused by a number of factors: somewhat weaker consumption of durable goods, weaker fixed investments, substantially weaker overall trade numbers, and increased contraction in governmental expenditures. The only improving factor was stronger inventory growth, which reverted to form after an anomalous fourth quarter reduction (most likely driven by a noisy, if not aberrant, price “deflater”).
From the Federal Reserve Bank of Philadelphia: The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from 35.9 in February to 43.4 this month (see Chart). This is the highest reading since January 1984. The demand for manufactured goods is showing continued strength: The new orders index increased 17 points this month, the sixth consecutive […]