December 9, 2019

Economix Blog: A New Sign of a Swoon

Don’t be fooled by the headline number – there was more evidence of a spring swoon in new government data released Tuesday.

While overall industrial production rose 0.4 percent, that increase was caused by a big 5.3 percent jump in production at utilities because of the cold weather in March.

Manufacturing output, which is a more telling indicator than the headline number, actually dropped by 0.1 percent.

Many analysts, like Barclays, were looking for manufacturing output to rise slightly last month, not fall, and the bank said it was one more sign the economy was entering a weak patch after stronger growth earlier in the year.

“This adds to the picture of a softening of activity at the end of Q1, relative to the start of the year, with weaker March data now seen across retail sales, employment and output,” Barclays said in a note. “Alongside a likely softening of household sector demand (reflecting a lagged response to January tax hikes) this leads us to expect softer output growth in Q2 relative to Q1.”

Another firm, IHS Global Insight, was similarly downbeat. Still, IHS noted that auto production was one bright spot amid the overall gloom.

“As expected, motor vehicle production increased again (+2.9%) and continues to be a bright spot in the economy, even as consumers face many headwinds,” IHS said. “Vehicle production should continue to lead manufacturing higher over the coming months.”

If the economy does indeed slow, as is widely expected, many economists say the cause will be fiscal austerity in Washington. Besides the payroll tax increase at the beginning of January, experts are watching the fallout from the automatic cuts in government spending recently imposed by Congress.

More information about the broad state of the economy will be out Wednesday, when the Federal Reserve releases its Beige Book survey of economic conditions across the country.

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Upward Revision in G.D.P. Hides Weakness in Economy

The Commerce Department said Thursday that gross domestic product expanded at an annual rate of 2.7 percent in the three months ended Sept. 30, well above the 2 percent estimate it gave in late October. But the revision was driven by increased inventory accumulation and a jump in federal spending — factors unlikely to be repeated in the current quarter, economists said.

“It’s a nice headline number,” said Nigel Gault, chief United States economist at IHS Global Insight, “but it exaggerates the underlying momentum in the economy. Sustainable improvements in growth are not driven by inventories.”

What’s more, the revised figures show that spending by businesses on equipment and software declined by 2.7 percent in the third quarter, the first decrease since the end of the recession in mid-2009.

Mr. Gault attributed the weak spending by companies in large part to growing uncertainty among executives about whether Congress and the White House can reach a deal before Jan. 1 that prevents more than $600 billion in automatic tax increases and spending cuts from going into effect early next year. “The No. 1 thing is the fiscal cliff,” Mr. Gault said.

The impasse in Washington has not only dominated the political debate since the election, but also become a leading worry for corporate America. President Obama met with business leaders on Wednesday to seek their support in negotiating a compromise, the second time he has sat down with prominent corporate chiefs this month, while Wall Street has wavered with each zig and zag of the debate.

The president and Congressional Democrats favor letting Bush-era tax cuts expire for top earners, while many Republicans have opposed any rise in tax rates and are pressing for greater reductions in federal spending.

Most observers expect a short-term compromise to be found that blunts the full effect of the tax increases and spending reductions, but economists say the risks to future growth are mounting. If a deal is not reached, the economy will grow at an annual rate of just 1.1 percent in 2013, according to a new forecast issued Thursday by Macroeconomic Advisers, with unemployment rising to 8.5 percent by the end of the year.

Unemployment now stands at 7.9 percent, still far above the level before the financial crisis and the recession, and it is not expected to come down significantly unless economic growth accelerates. For now at least, that seems unlikely.

“Over all, it was a disappointing report,” said Michelle Meyer, senior United States economist at Bank of America Merrill Lynch. The accumulation of inventories went from subtracting 0.1 percentage points from the initial estimate to adding 0.8 percentage points, she said.

“A lot of that inventory build was unintentional, which suggests a downside risk for the fourth quarter,” she said. “Businesses had expected stronger sales and consumer spending and were caught off guard.” Ms. Meyer said she expected the economy to grow by 1 percent in the fourth quarter of 2012.

The government also reported on Thursday that first-time unemployment claims dropped by 23,000, to 393,000, last week. But Ms. Meyer cautioned that these figures were much more volatile than usual because of the Thanksgiving holiday and Hurricane Sandy.

The weak underlying data in the report on third-quarter performance prompted Maury Harris, chief United States economist at UBS, to cut his projected estimate of fourth-quarter growth to 1 percent from 1.6 percent. “Part of this is Sandy and part of this is the inventories,” he said.

The uncertainty about what will happen in Washington is reflected in the sharp divergence of views among economists about growth in the first quarter of 2013. While Mr. Harris sees growth rebounding in early 2013, to an annual rate of 2.1 percent, Ms. Meyer estimates the rate of expansion will be less than half of that at 1 percent.

The Commerce Department data suggests that in spite of the caution about the future, the overall picture for companies remained healthy, with United States corporate profits reaching a record in the third quarter.

The increase from the second quarter was entirely a result of stronger business performance at home. Profits received from American-owned businesses abroad fell slightly in the third quarter, which may not be surprising given the recession in Europe and the slowdown in China.

There were signs of optimism in Thursday’s data. Residential fixed investment rose 14.2 percent, a sign that the housing recovery was gaining steam. A separate report from the National Association of Realtors showed pending home sales rose to a two-and-a-half-year high.

Indeed, not all economists took a pessimistic view.

“Just because the private sector is going into neutral doesn’t mean we have to automatically have a recession,” said Michael Gapen, senior United States economist and asset allocation strategist at Barclays. “Households are deleveraging, corporate balance sheets are strong, and business isn’t overextended.

“Short of a policy mistake in Washington, it’s tough to get a recession right now,” he said.

The new estimate of growth represents a substantial increase in the level of the second quarter, when the economy grew at a rate of just 1.3 percent. It also marks the fastest rate of expansion since the fourth quarter of 2011, when the economy grew at a 4.1 percent annual pace.

This was the second of the government’s three estimates of quarterly growth. The final figure is scheduled for Dec. 20.

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Japanese Economy Signals Rebound From Earthquake

Gross domestic product shrank at an annualized 1.3 percent rate in the three months ending June 30, posting three consecutive quarters of declines, the Cabinet office said Monday in Tokyo. The median forecast of 25 economists surveyed by Bloomberg News was for a 2.5 percent drop. Capital investment rose 0.2 percent, compared with a revised 1.4 percent decline in the first quarter.

The outlook for growth is at risk from the yen’s climb to near a postwar high, which threatens to hurt exporters like Toyota Motor and Sony at a time when a global slowdown may also cut demand for the nation’s products. The finance minister, Yoshihiko Noda, said he was ready to take “bold action” in currency markets if necessary.

“The headline number is better than expected, but it’s not like this is a strong number,” said Hiroshi Miyazaki, chief economist at Shinkin Asset Management in Tokyo. “The strengthening yen will start to weigh on exports and capital spending. We can expect positive growth in the third quarter, but the yen may damp that momentum.”

Toyota, the world’s biggest carmaker, expects to begin making up for lost output from the earthquake in September, one month earlier than previously announced, it said on Aug. 2. The company is hiring up to 4,000 temporary workers to help that effort.

A 15-yen change in the dollar-yen rate over the last year has “blown off” 300,000 yen, or $3,900, in profit on a $20,000 car, and a stronger yen has cut Toyota’s fiscal first-quarter operating profit by 50 billion yen, Takahiko Ijichi, the carmaker’s senior managing officer, said on Aug. 2.

A stronger currency makes Japanese products less competitive abroad and erodes overseas profits repatriated into yen.

“The exchange rate is at a level that has an extremely damaging effect on the Japanese economy,” Osamu Masuko, president of Mitsubishi Motors, said Aug. 4 after authorities intervened in the foreign-exchange market for the first time since March. “The resulting exchange rate still isn’t acceptable.”

Slower overseas growth may also weigh on demand for Japanese products. Tokyo Electron, the large maker of semiconductor equipment, cut its net income forecast for the year ending in March by 49 percent, to 34 billion yen ($442 million), citing lower-than-expected sales.

Consumer spending fell 0.1 percent in the April-June period from the previous three months, compared with a 0.6 percent drop in the first quarter, the report on Monday showed.

Most indicators from the quarter starting July 1 point to an economic rebound, with industrial production rising for three straight months since plunging in March. Companies are also forecasting they will raise output this month to make up for lost capacity resulting from the natural disaster, and sentiment among merchants exceeded levels from before the earthquake.

Japan and other Asia-Pacific markets were up in midday trading on Monday, helped partly by a short-selling ban on financial stocks in Europe.

The Nikkei 225 benchmark index in Tokyo rose 0.9 percent at midday. The Hang Seng index in Hong Kong was up 1.7 percent. The SP/ASX 200 index in Australia was up 1.7 percent.

In addition, United States stock futures were up about half a percent late Sunday night.

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