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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