MacroScope

Gimme a P, gimme an M, gimme an I

If you have ever wondered why financial markets and economists are interested in purchasing managers indexes, here is why:

A recovery in Europe? Really?

There’s a sense of relief among European policymakers that the worst of the euro zone’s crisis appears to have passed. Olli Rehn, the EU’s top economic officials, talked this week of a “turning of the tide in the coming months”. Mario Draghi, the president of the European Central Bank, speaks of “sizeable progress” and “a reassuring picture”.

At last week’s spring summit, EU leaders couldn’t say it enough: “This meeting is not a crisis meeting … it’s not crisis management,” according to Finnish Prime Minister Jyrki Katainen. All the talk is of how the euro zone’s economy will recover in the second half of this year.

But for the 330 million Europeans who make up the euro zone, the outlook has, if anything, darkened. As euro zone governments deepen their commitment to deficit-cutting, and rising oil prices mean higher-than-expected inflation, households can’t be counted on to drive growth. Not only did housing spending fall 0.4 percent in the October to December period from the third quarter, but unemployment rose to its highest since late 1997 in January.

Not your father’s ISM survey

Manufacturing activity picked up in January, an encouraging sign for U.S. growth prospects. Right? Perhaps not as much as it used to be. The shrinking role of factory production in the U.S. economy – now just over a tenth of the nation’s output – means the Institute for Supply Management’s closely watched survey is a less sturdy predictor of broader trends.

Neil Dutta, U.S. economist at Bank of America-Merrill Lynch, explains:

The ISM Manufacturing Index improved to 54.1 in January from 53.1 in December, the highest since June 2011 and broadly in line with market expectations. A level of 54.1 on ISM is consistent with roughly 3.5 percent real GDP growth. This tells you more about the state of the manufacturing sector than the broader economy, in our view. And, we are skeptical the pick-up in the ISM manufacturing index is a harbinger of a coming acceleration in economic growth.

A 3.5 percent rate looks lofty indeed: Current expectations according to Reuters polls are for a 2 percent GDP reading in the first quarter, with a number of analysts citing downside risks to their forecasts.

The irrelevance of slightly better U.S. economic data

The latest round of reports on the U.S. economy, while hardly the ringing endorsement of a robust recovery, have been a bit better overall. Jobless claims, while still high, have fallen to a seven-month low of 388,000. Industrial output, meanwhile, posted its largest increase since July as factory and mining production expanded strongly.

But investors are far too obsessed with the mess taking place in Europe to pay the modest improvements any mind. Even if Europe’s financial morass were not an ongoing cloud over the U.S. outlook, the incremental gains in U.S. economic activity remain far too modest to warrant any sort of optimism about a substantial decline in unemployment. Moreover, analysts are worried that the current political propensity in Washington for spending cuts rather than renewed stimulus poses another threat to growth.

Thomas Lam at OSK-DMG sums up the sentiment nicely:

Incoming data over the past month or so have been generally more spunky. […] The continued tightening in financial markets and depressed sentiment indicators still imply downside risks to growth in subsequent quarters. But the key driver to the 2012 outlook, at least for the early part of next year, is fiscal policy considerations.

from Ian Bremmer:

The secret to China’s boom: state capitalism

By Ian Bremmer
The views expressed are his own.

One of the biggest changes we’ve seen in the world since the 2008 financial crisis can be summed up in one sentence: Security is no longer the primary driver of geopolitical developments; economics is. Think about this in terms of the United States and its shifting place as the superpower of the world. Since World War II, the U.S.’s highly developed Department of Defense has ensured the security of the country and indeed, much of the free world. The private sector was, well, the private sector. In a free market economy, companies manage their own affairs, perhaps with government regulation, but not with government direction. More than sixty years on, perhaps that’s why our military is the most technologically advanced in the world while our domestic economy fails to create enough jobs and opportunities for the U.S. population.

Contrast the U.S. and its free market economy with China’s system.  For years now, that country has experienced double digit growth. Many observers would say that China’s embrace of capitalism since 1978, and especially since joining the World Trade Organization in 2001, has been responsible for its boom. They would be mostly wrong. In fact, a new study prepared for the U.S. government says it’s not capitalism that’s powering China, but state capitalism -- China’s massive, centrally directed industrial policy, where the government positions huge amounts of capital and labor in economic sectors it intends to nurture. The study, prepared by consultants Capital Trade for the U.S.-China Economic and Security Review Commission, reads in part:

In a world in which central planning has been so utterly discredited, it would be natural to conclude that the Chinese government and, by extension, the Chinese Communist Party have been abandoning the institutions associated with the communist economic system, such as reliance on state‐owned enterprises (SOEs), as fast as possible. Such conclusion would be wrong.

Being poor is no fun: study

Poor people have shorter life spans and more health problems than the wealthy. Surprising? For growth-obsessed economists, yes actually. A new study from The Organization for Economic Cooperation and Development represents a worthy attempt to move economics away from its traditional tendency to equate growth with well being. Its rankings suggest factors other than the rate of gross domestic product expansion are important in determining quality of life.

But as often happen when economists look for a human angle in their research, they end up stating the glaringly obvious. Take this statement:

Some groups of the population, particularly less educated and low-income people, tend to fare systematically worse in all dimensions of well-being considered in this report. For instance they live shorter lives and report greater health problems; their children obtain worse school results; they participate less in political activities; they can rely on lower social networks in case of needs; they are more exposed to crime and pollution; they tend to be less satisfied with their life as a whole than more educated and higher-income people.

from Global Investing:

We’re all in the same boat

The withering complexity of a four-year-old global financial crisis -- in the euro zone, United States or increasingly in China and across the faster-growing developing world -- is now stretching the minds and patience of even the most clued-in experts and commentators. Unsurprisingly, the average householder is perplexed, increasingly anxious and keen on a simpler narrative they can rally around or rail against. It's fast becoming a fertile environment for half-baked conspiracy theories, apocalypse preaching and no little political opportunism. And, as ever, a tempting electoral ploy is to convince the public there's some magic national solution to problems way beyond borders.

For a populace fearful of seemingly inextricable connections to a wider world they can't control, it's not difficult to see the lure of petty nationalism, protectionism and isolationism. Just witness national debates on the crisis in Britain, Germany, Greece or Ireland and they are all starting to tilt toward some idea that everyone may be better off on their own -- outside a flawed single currency in the case of Germany, Greece and Ireland and even outside the European Union in the case of some lobby groups in Britain. But it's not just a debate about a European future, the U.S.  Senate next week plans to vote on legisation to crack down on Chinese trade due to currency pegging despite the interdependency of the two economies.  And there's no shortage of voices saying China should somehow stand aloof from the Western financial crisis, even though its spectacular economic ascent over the past decade was gained largely on the back of U.S. and European demand.

Despite all the nationalist rumbling, the crisis illustrates one thing pretty clearly - the world is massively integrated and interdependent in a way never seen before in history. And globalised trade and finance drove much of that over the past 20 years. However desireable you may think it is in the long run, unwinding that now could well be catastrophic. A financial crisis in one small part of the globe will now quickly affect another through a blizzard of systematic banking and cross-border trade links systemic links.

High-flying economic indicators

At a meeting of the National Association for Business Economics in Dallas,  discussions on the economic outlook turned so gloomy at one point that a  well-known economist was heard to say he’s inclined to sell everything and  “just buy a gun.”

Herb Kelleher, Southwest Airline’s co-founder and chairman emeritus,  offered a different view when he addressed the group on Monday. As it turns  out, although Kelleher majored in English (with a minor in philosophy), he has a favorite economic indicator too. Advance airline bookings, he said, say more about the economic outlook than is widely understood – in fact, he  said, for years the large department store companies used to call him in early  December to check on bookings so they could predict what kind of a Christmas selling season they might have. Asked what bookings look like today, he said:

I’ve been pleasantly surprised by the number of bookings and the revenue per available seat mile. What scares me is that it looks pretty good this month, but I haven’t any idea of what it looks like next month.

An even more British excuse

Britons have a reputation for endless talk about the weather, and the UK’s Office for National Statistics is no different.

We’ve already noted how the ONS cited the effect of the royal wedding and surrounding bank holidays as one reason why the economy only managed growth of 0.2 percent quarter-on-quarter between March and June.

While that’s taken up most of the talk, the ONS also pointed to the “record warm weather in April” as another “special event” that dented economic growth.

A very British excuse

This time it was the royal wedding. When the economy shrank unexpectedly late last year, it was the bad weather. If Britain’s economy again struggles to generate growth in the current quarter, perhaps it will be blamed on the new series of ‘The Apprentice’.

"Thanks for nothing!"

Britain’s economy grew 0.2 percent quarter-on-quarter between March and June, exactly in-line with the Reuters poll consensus. Perhaps the most interesting part of the GDP release statement was the Office for National Statistics’ claim that without special factors, including the royal wedding, growth could have hit 0.7 percent.

That would have taken the GDP index at market prices back above 100 points – its 2006 base level – for the first time since the recession, but as it happened, it fell just short, at 99.8.