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Current Economic Perspectives


The July global Purchasing Managers Index (PMI) signals a robust start to 2H2014. Service sector growth continued to strengthen in July, offsetting a mild deceleration in manufacturing sector output, while new order inflows remain solid overall.
China’s July manufacturing PMIs showed a modest gain. The July PMI uptick and the June macroeconomic indicators indicate a decent upturn in industrial growth toward the end of 2Q. The data reinforces the view that the economy is showing positive momentum going into 3Q.
In the US, the PMI values are near cyclical highs. The manufacturing sector PMIs remain near record high values while the service sector indices have achieved record levels.
The euro zone delivered a disappointment this week, with the likelihood that 2Q growth, to be reported next week, will show an annualized gain of only 0.5% q/q.
There are now competing narratives for the euro zone. The region is well positioned to see a recovery in spending after two deep back-to-back recessions. However, as well as the lack of momentum in 1H2014, there is the worry of escalating tensions in Europe’s relationship with Russia, which, in a novel move this week, imposed sanctions on itself, baring certain food imports. In addition, the pronounced reluctance of the European Central Bank (ECB) to act is a downside risk.
This week, ECB President Mario Draghi observed that those nations - Spain and Portugal - that have done the most structural reform are outperforming those nations – France and Italy - that have lagged on reforms. It is also interesting to note that those nations who were the most aggressive in responding to the 2008 – 2009 financial crisis – the US and UK – are now the growth leaders in the global economy.

As of Noon Today
Aug. 8, 2014 3-Months Ago
(May) Year Ago YoY Change
Global Dow Index 2,524.1 2,525.9 2,268.9 11.2%
Brent Crude Oil $104.83 $108.19 $107.32 -2.49/bbl
Dollar/Euro 1.342 1.386 1.339 0.2% $ depr
Yen/Dollar 101.87 101.66 96.03 6.1% $ appr
China RMB/$ 6.156 6.227 6.121 0.6% $ appr
10Y T Bond 2.39% 2.61% 2.58% -19 bps


US Achieves Modest Growth after Five Years of Expansion

The current quarter marks the beginning of the second five years of the current US economic expansion. After the 2008 – 2009 Great Recession, recovery in the US began in July 2009. To many, it will not seem possible that five years has elapsed since those difficult days of financial collapse and economic decline. However, after proceeding in very pronounced fits and starts, the US expansion has finally arrived at a point of modest strength.

In the context of the global economy, the US, the UK and Germany are at the leading edge of economic performance. However, as the world’s largest economy, the gradual normalization in the US creates a strong foundation for the support trade and investment provides to balance of the global economy. As a result, the global economy is progressing through a healing process. With recovery having spread to the euro zone and Eastern Europe over the past year, risk has shifted to the Growth Market economies.

The outlook for the Chinese economy is the number one trip wire for the global economy. China’s strong 8.2% q/q GDP increase in 2Q was a result of a range of mini-stimulus policies. The Japanese economy remains on the uptrend after the April 1st consumption tax hike. However, with disappointing June and July data, recovery is at a slower than expected pace.

In the US, the current expansion has been notable in three respects:
Spending by consumers on services – which makes up 45% of GDP – has been very weak. With an annual average growth rate of 1.6% during the current expansion, services spending growth is down from an average of 4.0% across all ten expansions since 1945.
Spending by federal, state and local governments fell at an average annual rate of 1.6% during the current expansion. By contrast, spending growth was 3.1% across all ten expansions since 1945.
Investment spending growth by households and businesses on equipment, structures, inventories and intellectual property has largely been in line with prior expansions. However, there has been a notable shift in the composition of that spending. Residential and nonresidential construction spending growth has been weak, as has growth in spending on intellectual property. By contrast, spending on inventory building, business equipment and software has been strong.

Economic expansions end for a wide variety of reasons – monetary policy errors; high energy prices that reduce consumers’ disposable income; price and wage inflation that erodes profitability and causes reduced business spending; supply constraints that results in double ordering, excess inventory accumulation, and production cutbacks; etc. None of these conditions appear to be present in the US economy today. While it is a virtual certainty that the US will suffer another recession at some point in the future, the current expansion appears to have life left in it.


Taiwan is a Bell Weather for Global Trade

The Taiwanese economy gained a firmer footing in 2Q, as domestic and external demand ended on a strong note. The welcome result suggests that the economy is on track for slightly stronger growth in the short term.

Taiwan’s latest external trade data is a positive signal for the global demand and Greater China exports. Signs of improving demand are not confined to technology industries. Demand for non-technology products is also improving.

Advance estimates show that 2Q real GDP rose 3.8% y/y, accelerating from a 3.1% y/y increase in 1Q. The increase marked the strongest growth in six quarters.

Exports gathered momentum, as increasing demand for electronic products and machinery continued to provide support, helping counterbalance shrinking sales of mineral, optical instruments, and information and communication products. In addition, surging visitor arrivals helped propel service exports. Exports of goods and services rose 4.5% y/y in 2Q, compared with 1Q's 3.9% y/y expansion.

A gradual recovery in the Mature Markets, coupled with the launch of new products and stronger demand for hand-held devices, will continue to support the island's technology sector and related export demand.

Nonetheless, external headwinds continue to linger. Policy uncertainties and high jobless rates are still clouding the Mature Market economies, most notable the euro zone. Concerns over economic and financial developments in China, despite recent improvement, also overshadow regional trade flows. Meanwhile, the island's mobile phone, panel, and computer makers are facing increasing competition. These factors will continue to constrain Taiwan's growth prospects.


Global Data Weekly

World: The composite purchasing managers index (PMI) reached a new peak, climbing 0.1 to 55.5 during July. The manufacturing sector index remained nearly unchanged down 0.1 to 52.5, not far removed from the recent February multi-year peak of 53.2 reached earlier in the year. The service sector PMI made up for the tiny manufacturing slip by rising 0.2 to 56.0, another new peak value.

US: Both the Institute for Supply Management (ISM) and Markit PMI measurers are at or near post recession cyclical peaks. The ISM composite PMI rose to an all-time peak of 58.4 after gaining 2.5 points in July. The Markit composite PMI dropped 0.4 points to 60.6, the second highest value recorded.

ISM manufacturing sector PMI rose nearly two points in July to 57.1 an elevated level for the US. Markit manufacturing sector PMI had hit an all-time peak in June and descended 1.5 points in July to 55.8. The overall index level and the manufacturing output PMI sub-index of 59.7, both remain at robust signal points. The ISM index for the services sector hit an all-time peak at 58.7, while the Markit PMI of 60.8 stayed nearly unchanged from the June service peak. PMI index values over 60 are rare in general, but particularly unusual for mature markets.

The US trade balance shrank to -$41.5B in June as oil exports expanded 11% y/y and all other export good rose 1.3% y/y. Excluding petroleum, the trade deficit in all other goods has expanded from -$35.6B a year ago to -$44.8B as the expanding American economy drove import growth at a faster rate than export growth. Over that same time frame, the petroleum trade deficit improved from a -$17.9B gap to -$14.6B.

June durable goods orders were revised from the initial estimate of a 0.7% m/m increase, published two weeks ago, to a 1.7% m/m increase this week. With limited information from the US Census Bureau, the revision appears abnormally large and concentrated in electrical equipment and computers. Non-durable goods orders rose 0.6% m/m as the demand for petroleum production continues to grow. Over the past two months, April to June, the entire gain in non-durable goods orders was the $1B increase in petroleum, as on net, all other non-durable goods were flat.

Unemployment claims fell to 289,000 in August and lowered the four week moving average from 297,500 to 293,500. The current rate of jobless claims was the lowest since 2006. Unfortunately when claims fall below 300,000 and remain under 300,000 for more than a month, this marks a market peak. The overheating conditions cannot be maintained and before each of the past three recessions the economy begins to contract within 90 weeks. Peculiarly, a slight rise in claims would be more beneficial in the long run.

Labor productivity attempted a rebound in 2Q, rising 2.5% q/q after cratering in 1Q contracting 4.5% q/q. Current productivity remains 0.6 ppts. lower than 4Q as the tremendous influx of new hires has not yet equaled an equivalent gain from national output value. Consequentially unit labor costs rose 11.8% q/q in 1Q and gained 0.6% q/q in 2Q.

Wholesale inventories rose only 0.3% m/m in June, half the expected consensus rate. May inventories were revised down from an initial 0.5% m/m gain to 0.3% m/m. Slower inventory build will shave some of the strength from 2Q GDP growth estimate.

Brazil: Economic activity contracted yet again in the composite PMI as it dropped 0.6 points to 49.3 in July. The manufacturing sector index improved but remained under 50.0 at 49.1, and the service sector PMI weakened by more than a point dropping to 50.2. Overall, the PMI index shows a stagnating economy with insufficient growth.

Euro zone: Retail sales rose 0.4% m/m across the euro zone in June and both April and May sales were revised higher by 0.3 percentage points. At the same time, two months in 1Q were revised lower. The result left the annual growth rate little changed in May at 0.6% y/y, but shifted economic activity from 1Q into 2Q.

Overall, economic growth in Europe continues to improve as shown in the July composite PMI rising one point to 53.8 only 0.2 points from the series peak. The manufacturing sector PMI remained equal to June at 51.8 and the service sector PMI rose to 54.2 the highest value in over three years.

Germany: The results of the July PMI, not surprisingly, were closely correlated to the euro zone. The composite PMI rose to 55.7 the highest value in three months, identical to the euro zone. Additionally the service sector PMI rose two points to 56.7 the highest in over three years. The manufacturing sector index ticked marginally higher, up 0.4, to improve to 52.4 in July.

Contrasting to the positive attitudinal measurement in the manufacturing PMI, actual factory orders fell 3.2% m/m in June after contracting 1.6% m/m in May. Compared to a year ago orders were 2.3% y/y lower.

Industrial production rose 0.3% m/m in June a disappointing rebound after a steep 1.7% m/m contraction in May. Output was 0.4% y/y lower than a year prior for the first annual decline in a year. Compared to a year prior output decelerated from May’s 2.6% y/y gain to a mere 0.6% y/y advance in June.

Exports rose 0.9% m/m in June after a 1.1% m/m decline in May. Imports rose a startling 4.5% m/m also rebounding from a 3.4% m/m contraction. Import gains were the fastest since November 2010, narrowing the trade surplus from €18.8B to €16.3B.

France: The composite PMI improved in July rising more than one point to 49.4. However, the overall PMI remained under 50.0 for the third month continuing to signal contractionary forces continue to outweigh any expansion. Within the total, the manufacturing sector PMI slipped to 47.8 but was more than compensated by a service sector PMI gain of two points to 50.4. July continues a disturbing trend of mixed messages emanating from economic data.

Industrial production rose 1.3% m/m in June improving from the 1.6% m/m loss in May. The gain improves output from a 3.4% y/y loss in May to a smaller 0.4% y/y decline.

The Bank of France announced it expects both 2Q and 3Q GDP will expand by an identical 0.2% q/q. These gains would improve upon the stagnant GDP in 1Q and match the 0.2% q/q in 4Q2013.

Italy: Economic vitality continued in July as the composite PMI softened one point to a still robust level of 53.1. The subcomponents of manufacturing and service both declined in July. However, the manufacturing sector may be cause for concern, falling for the third month in a row to 51.9. The index is now weaker than any value in 1Q or 2Q. The service sector PMI dropped one point to 52.8, the second highest value in years as the sector continues to expand rapidly.

Industrial production rose 0.9% m/m in June but not enough to recover from the 1.2% m/m decline in May.

Real GDP contracted 0.2% q/q in 2Q after a small 0.1% q/q dip in 1Q. The quarterly decline is the 11th of the past 12 quarters, with only the tiny 0.1% q/q gain in 4Q2013 to break the long slide. No further sector detail has yet been made available; however widespread expectations had been for a 0.3% gain stand dashed. Expect the forthcoming GDP component release to reveal why Italy has fallen back into a two quarter recession.

Spain: The July composite PMI, at 55.7, matched the 2Q average PMI as the economy continues to expand rapidly. With an unemployment rate that stands above 24%, the expansion begins from a very depressed level. The manufacturing sector slowed slightly dropping 0.7 points to 53.9, a still rapid rate of expansion. The services sector rose 1.4 points to 56.2, the second best rate of expansion in years.

UK: Once again the composite PMI reached 58.4, which is the previous peak set in April. The manufacturing sector PMI may have dropped to 55.4, but that rate still represents a significantly high rate of growth. As the economy continues to record tremendous optimism, the service sector PMI sector rose more than a point to 59.1, the best value in eight months.

Manufacturing production, up 0.4% m/m in June and 1.9% y/y, still stands roughly 8% below the pre-recession peak output levels. If actual output will match the optimism arising from the survey data, expect large gains in production output.

Russia: After a likely two quarter contraction to begin the year, the July composite PMI rose a point into positive territory at 51.3. The manufacturing sector PMI at 51.0 reflected a rebound in output. However, the service sector PMI remained mired below 50.0 at 49.7. One positive month in only one half of the economy will be insufficient to end the recession, more gains will be necessary.

Russia: The fifth largest food importer in the world, Russia, announced it will enact food import limitations as retaliation on western nation’s trade sanctions. The impact of the action on product available and food price inflation remains to be seen.

Turkey: Manufacturing contracted for the second month as the PMI remained below 50.0 and fell from June at 48.8 to 48.5 in July.

South Africa: The manufacturing sector index fell three points in the PMI survey to 46.4 in July, the lowest level of the past four contracting months. Labor strikes and work stoppages held the index to the lowest value in three years.

Despite strikes and a weak PMI survey, manufacturing production gained 1.4% m/m in June. Although much of the gain was a rebound from a large 3.4% m/m decline in May. The June rebound lifted the annual rate from a contraction in May to a modest 0.5% y/y rise.

Japan: The composite PMI contracted for three months following the April 1st value add tax hike. Despite expectations of a turnaround, the index increased just 0.2 points in July and, at 50.2, just barely cleared the growth threshold.

The July service sector PMI, at 50.4, increased 1.4 points from June. It was the first month since March when the index reflected any expansion. The manufacturing sector PMI had crested 50.0 in June, to 51.5, and surprisingly fell one point to 50.5. in July. The post-tax hike rebound was expected to propel the manufacturing sector PMI higher this month.

Exports rose 4.4% y/y but imports increased 13.9% y/y. The unfavorable combination erased the four month running trade surplus, at $522.8B in May to a $399B deficit in June.

July economic conditions index improved by 3.6 points in the economy watchers survey rising to 51.3 confirming the return of better conditions post the consumption tax hike.

China: The manufacturing sector improved in both the private and official PMI surveys during July. Coincidentally, both indexes surged to 51.7. The services sector slumped in July as the private sector PMI fell three points to neutral at 50.0 while the official service sector PMI registered only a small 0.8 point dip to 54.2.

Exports recovered in July rising 14.5% y/y up from 7.2% y/y in June and considerably improved from the contractions of February and March. Meanwhile imports fell 1.5% y/y as weak demand mixed with falling prices in some commodities lowered the import bill. July was the third month of the past five that imports declined on a year over year basis.

Taiwan: Exports rose from a mere 1.2% y/y gain in June to 5.8% y/y in July. The expected promise of a September 9th release of the iPhone 6 US has analysts guessing which month the delivery surge from China and related suppliers in Asia will appear as manufacturing output and exports.

India: The composite PMI remained at an elevate rate in July at 53.0 in July, well in excess of any quarterly value for more than a year. At its current pace, the 3Q2014 PMI could match the best index value since 1Q2013 of 54.2. The manufacturing sector in particular was up 1.5 points to 53.0, the highest level in 18 months. The service sector PMI hit a similar 18 peak in June but softened, falling two points to 52.2, a still rapid rate of growth.