Low visibility for some weeks to come yet

by: Han de Jong

Economic data continues to be very soft. And we still don’t know what to make of it exactly. Surely, the weather in the US is the main culprit. But it is only natural for an optimist like myself to wonder and worry if there isn’t anything more serious going on. The adverse weather continued in February in large parts of the US. Even if things return to normal now, it won’t be until the March data is released in April before we will get a clearer picture of underlying economic trends. For now, I see no reason to change our view that the global economy will do better in 2014 than in 2013, that the US will be the leader in terms of direction, that Europe will re-connect to the international economic cycle, that Japan will withstand the tax hike in April, albeit with additional BoJ help, and that emerging economies will be volatile but not fall into crisis.


Weather or more

US data continues to be significantly distorted. I must admit to being confused over some of the data. Several series appear affected in a significant way while others do not. Construction activity and other housing related economic series are obvious victims of bad weather. It is no surprise then, that housing starts fell by 16.0% mom in January after a drop of 4.8% mom in December. And existing home sales fell 5.1% mom in January. The confidence index of homebuilders, the NAHB index, dropped from 56 in January to 46 in February. This was the largest monthly drop in the 28-year history of this series. It is tempting, of course, to blame this on the weather. However, the series breaks down into four regional ones and, oddly, the series for the West dropped the most. This does not fit in at all with the weather patterns and suggests that there is something more going on. Pessimists conclude that the data shows the housing market is experiencing a fundamental weakening. I find that conclusion hard to square with the facts. Higher mortgage rates are the favourite culprit among housing market pessimists. However, even if higher borrowing costs are affecting the market negatively, it remains odd that builders’ confidence in the West should be weaker than in the East and Mid-West, as mortgage rates are the same everywhere, but the weather is not.

Key business confidence indicators are also painting a confusing picture. The Empire State index, measuring business confidence in the New York Fed’s district, which was affected by adverse weather, fell from 12.5 in January to 4.5 in February. The February level is not particularly low. The Philly Fed’s index of confidence in its own district fell from 9.4 in January to -6.3 in February, which is the lowest reading in 12 months. On the other hand, the Markit PMI for the US as a whole rose in February: 56.7 versus 53.7 in January and 55.0 in December.

Initial jobless claims appear to be totally unaffected by the weather recently. The number of claims jumped higher in December, but has come down since then and has been remarkably stable since the start of the year at a ‘normal’ level. The four-week average has moved within a narrow range of 6,000 people during the last six weeks. The most recent weekly reading of 336,000 is signalling a continued improvement of labour market conditions at a modest pace. Why series from construction activity to retail sales and industrial production seem affected by the weather, but jobless claims are not, is beyond me.

Inflation remains well behaved. Risks of unpleasant deflation or above-target inflation seem very small. Headline and core inflation amounted to 1.6% yoy in January. The weather does not seem to have had any impact on overall price trends.

Lack of visibility is not just a problem for you and me, it is also a problem for the Fed. No surprise then that the Fed is signalling that it is determined to stick to its guns. The minutes of the January FOMC meeting suggest that continued USD 10 bn a month tapering of asset purchases is the most likely course of action.

European confidence: a touch softer

Various confidence indicators in Europe lost a little ground in February. The ‘expectations’ component of Germany’s ZEW index, measuring confidence among financial analysts, fell from 61.7 in January to 55.7 in February, though the ‘current-conditions’ series continued to rise: 50.0, versus 41.2. The preliminary PMI for the eurozone eased as the manufacturing series dropped from 54.0 in January to 53.0 while confidence in the services sector inched higher. The composite index fell marginally. The modest drop in overall business confidence is most likely just noise. It could even be that the weather in the US has had a modest impact. We must also take into consideration that momentum built in the latter part of last year and it is only natural for that process to take a breather occasionally.

Last week’s UK data was also surprisingly weak. Retail sales, employment and public finance reports disappointed. This is in line with data in other economies, but not with the UK’s recent strong run. The flooding may have had an impact.

Various leading indicators have suggested for some time that a meaningful acceleration of world trade growth is imminent. So far, the hard data is showing a positive trend, but remains patchy. According to figures provided by the Dutch CPB, world trade volumes fell 0.4% mom in December after remaining unchanged in November. That sounds weak, but October was very strong and the rise for Q4 versus Q3 still amounted to 1.7%, showing a clear improvement on Q2’s 0.5% and Q3’s 1.2%. All this still looks modest compared to new truck registrations. In the eurozone, for example, HGV registrations rose sharply towards the end of last year, though that was partly caused by the introduction of a more stringent emission regulation at the start of this year (Euro 6).

Mixed elsewhere also

Japan’s Q4 GDP growth disappointed, amounting to 0.3% qoq or 1.0 annualised. The detail of the report was more encouraging as domestic demand expanded briskly, but strong imports reduced the overall growth rate. It is a little surprising that the sharp depreciation of the yen over the last 18 months has not helped net exports. Economic theory suggests this is a matter of time. I am happy to stick to that view.

Singapore and Taiwan produced disappointing trade data last week. Electronics exports from Singapore fell 17.0% yoy in January, down from -3.1% in December. Taiwan’s export orders were down 2.8% yoy in January, after +7.4% in the previous month. While these economies are not particularly dominant on the global level, they are early-cyclical and worth following. Before drawing pessimistic conclusions, I need to point out that Chinese New Year can affect and distort this sort of data early in the year, and the weak January data is perhaps also due to a base effect, as the January data last year was very strong.

Finally, even Chinese data was mixed last week. Business confidence, as measured by the HSBC PMI, fell from 49.5 in January, which was a disappointment then, to 48.3 in February. We do not consider this series to be the best indicator for the Chinese economy, but other gauges of business confidence do not paint a fundamentally different picture. On the other hand, data on credit was stronger, suggesting that China is not experiencing some sort of credit crunch.

All in all…

All in all, it remains very hard to say what is happening to the global business cycle at the moment. Or more to the point, business cycle conditions are weakening but it is not clear whether that is caused by the weather in the US and other temporary factors or by something more disturbing. Having said that, I see no reason to be unduly pessimistic at this stage. Apart from the weather, the inventory cycle and higher mortgage rates in the US likely play a role, but even such factors will not undermine the favourable underlying developments in the global economy.