Thursday, September 2, 2010

How Far Is Too Low?

On Wednesday, we saw the stock market surge moderately on Increased Chinese PMI, Australian Q2 GDP growth, and ISM better than expected numbers.

Today, Bloomberg tells us the U. S. has avoided recession because the economic data cannot get much worse.  When you read commentary like this, you need to fall back on your macroeconimic framework and deal with the data in analytical terms.

Chinese PMI was up only one-half percent, but there had been speculation it might fall .  Consequently, the Western commentators saw this as meaning increased future exports to China.  The Chinese stock market fell despite the Chinese PMI going up.  China was been taking steps to moderate inflation and a real estate bubble.  It has been taking steps to promote the use of the yuan in trade and equity markets to decrease the use of foreign currencies.  It has been emphasizing and growing internal production for internal consumption.  Too much is being made of a modest increase with mixed data, which surprised analyst expectations.  Of eleven categories, ten fell: new export orders, imports, output, backlogs of orders, stocks of finished goods, stocks of purchases were all down.  Four of the categories were below the expansionary level of 50.

Australian Q2 GDP was up 1.2% beating the expectation of .9%.  This was hailed as proof that exports, of which Australia is heavily dependent on China, would expand, because this GDP number included a 5.6% increase in export volume.  Unfortunately, the trade effects which have encouraged exports will not last much longer and the Australian economy is being driven by increased personal consumption in which private debt is increasing and savings decreasing.  Additionally, the Australian political scene is very uncertain as the recent election was, for all practical purposes, was a tie and any coalition government will dependent on obtaining at least 3-4 of five independent members of parliament, none of whom have any close affinity with either choice of government.  It is doubtful any coalition will last for any significant length of time.

U.S. Institute of Supply Management Manufacturing Index was up eight tenths to 56.3, while expectations had been a possible decline of 2.5.  However, new orders declined and inventory increased.  One should reasonably expect this index to decline going forward.

Just as economists can get lost in models which do not listen to the streets and limit data or the analysis of data and information, the public commentators often fail to utilize a macroeconomic framework to provide consistency and methodology.

The above reports and the reactions to them at this time could well be the anxious grasping for hope.  The reality is that lagging economic indicators will catch up with current indicators starting at the end of September and particularly in October and November.  There is every reason to believe unemployment will increase, housing prices will decrease and housing inventory increase, earnings reports will start to confirm and second half slow down as will GDP reports from countries around the world.  As an example, Spain was up two tenths on sales tax increases (VAT) and Germany is acknowledged to have lower (perhaps significantly) Q3 growth than its export driven 2.2% Q2.

Do not just read the news reports; dig into the data and the information and context behind it.

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  1. Michael's blog and air show are great. He's here to inform us, not to entertain. Economic news is IT today, and he helps us to understand our world.

  2. I was a little lost at first reading this, due to the jargon. When I finally figured it out, I was okay. Challenging us to think more is good. Maybe the more we know about such things, the less likely mistakes like the financial crisis and people not understanding their mortgages can prevent repeats in the future.

  3. You're honest and you're the real deal. However, it seems that there is a problem of "fog factor" from jargon and acronyms that most of us don't know. If you're trying to capture the teachers, small business owners and most of still working we DON'T HAVE TIME to look up each of these acronyms. This article is a good example.

  4. There are only four acronums in this article.

    GDP, which is Gross Domestic Products, is widely used by main stream media and commonly accepted as indicative of national economic growth.

    ISM, which is the Institute of Supply Management,has been fully enunciated many times on the radio show and they issue several different economic indexes. This was clearly identified as their manufacturing index.

    PMI, which is purchasing manufacturer's index, was not spelled out in this article although I refer to it several times during a month of the radio show. There are several different PMI indexes nationally, from other countries, and regionally from different Federal Reserve Banks. Even the referenced link does not spell PMI out despite using it repeatedly. I can see how someone who is not in business (it has direct effect on business costs and consumer prices), or has not studied economics in even a general survey course as everyone should, might have to look this up.

    VAT is clearly defined as a sales tax applied nationally.

    I appreciate the comments. Thank you.


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