The US economy is healing, but are consumers?
The next round of US economic data starts today with S&P/CaseShiller figures on US house prices expected (14:00 GMT) to show further declines MoM in the 20 largest cities.
Later consumer confidence figures for December will take the stage and are expected (15:00 GMT) to come out at 58.6 up from 56.0 in November indicating that consumers are hanging in there despite negative headlines throughout the media. On manufacturing both the Richmond Fed and Dallas Fed manufacturing indices are out with both expected to climb in December from the previous month indicating a slight uptick in manufacturing.
While US economic data continues to be mixed it tells us though that the US economy is slowly healing and the latest job data gives hope that the labour market will finally pick up some steam; the joker here is of course how things play out in Europe.
US real GDP has surpassed its former peak prior to the financial crisis but the GDP numbers are a misconception in economics. It is much more interesting to look at employment figures (see chart below) and there the picture is pretty obvious – the US economy has added around 2.5 million jobs since December 2009 but it still has 6 million jobs to fill before we reach the former peak – due to productivity increases aggregate production is higher despite less people being employed. However, the trend is right and the effect on the economy from more employed is very positive.
Also the chart below from St. Louis Fed is worth looking at from time to time. It shows the current economic expansion based on four metrics compared to previous expansions since 1949. As you can see, this expansion is below average but interestingly enough on employment one business cycle recovery saw weaker improvement since 1949 – so it has been much worse before.
European debt crisis is second thought today as stocks climb on US economic data
Stocks in Europe are climbing for the third day as investors are focusing on the positive data coming out of the US last week and today’s consumer confidence and manufacturing figures which are expected to rise month-over-month. The Euro STOXX 50 Index is up 0.3 per cent driven by gains in Total (+0.8%), Bayer (+1.5%) and Sanofi (+0.8%) on volume way below average.
Seismic shifts in economic power continue with Brazil surpassing UK
Those who have studied economic history know that China and India combined were the largest economies in the world before Europe’s renaissance. Since then their quest for socialistic thoughts (particularly in India) and mercantilism/protectionism in China set in motion a long relative decline in economic power. Now we all know that this trend has reversed again with China and other emerging markets catching up to the rest of the world. Lately economic data has pointed out that Brazil has surpassed the U.K. economy (formerly the largest economy in the world) as the sixth largest economy in the world in 2011.
The chart below confirms this as it shows the nominal GDP in billion USD on a rolling four quarter basis. Brazil’s relative pick-up from a bottom in the first quarter of 2003 is amazing and has come about as the Brazilian economy has grown 21.5 percent annualised since the first quarter of 2003 in USD figures; most of you will probably think these are manipulated numbers and not true because an economy cannot grow that fast. Well Brazil’s real GDP has growng 4.6 percent annualised since 1Q 2003 and inflation has increased 5.4 percent annualised in the same period – so what resulted in the last relative catch up? The massive 50 percent decline in the GBPBRL currency cross (see the second chart). So Brazil’s relative wealth in the world has come about through high real economic growth, moderate inflation and an impressive strengthening of the Brazilian Real against the British Sterling Pound.
In 2001, Chairman of Goldman Sachs Asset Management Jim O’Neill coined the expression BRIC countries (Brazil-Russia-India-China) in his paper “Building Better Global Economics BRICs”. O’Neill’s observations were merely that those four countries were at the forefront of globalisation pushing emerging markets ahead in many aspects. Looking at underlying data O’Neill was merely pointing to an obvious trend in economic power, but somehow he was the first to fixate the developed world on the issue.
Despite all doomsayers in the developed world, the emerging economies will continue to grow at rates we can only dream of in developed economies. The unleashing of fractional market forces in the former backward economies are creating a true miracle everyday as more and more people are pulled out of poverty, in fact market forces are doing a lot better job than the UN and other organisations combined in improving ordinary people’s conditions. In a not too distant future more emerging economies will surpass developed economies shifting the balance of power in the world.
Peter Garnry,
SAXO BANK