Monthly Archives: August 2009

Hong Kong recovery ‘made in China’

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Yes, this further supports the notion that some of the world economic improvement was due indirectly to ‘one time’ inventory building and additions to capacity in China, including the eurozone, where exports nudged France and Germany to positive GDP reports.

Hong Kong Climbs Out of Recession as Trade Improves

August 14 (Bloomberg) — Hong Kong climbed out of a yearlong recession as trade improved, adding to signs that the global economy is recovering.

Gross domestic product rose a seasonally adjusted 3.3 percent in the second quarter from the previous three months, after dropping 4.3 percent in the first quarter, the government
said today. The median estimate in a Bloomberg News survey of seven economists was for a 1.2 percent gain.

The Hang Seng Index has gained 84 percent from this year’s low in March as China’s record lending and 4 trillion yuan ($585 billion) stimulus package help the city, which is a hub for
trade and finance. Hong Kong’s government raised its forecast for this year’s GDP to a contraction of between 3.5 percent and 4.5 percent today from a previous estimate of a 5.5 percent to
6.5 percent decline.

“This rebound has largely been ‘Made in China,’” said Brian Jackson, a senior strategist at Royal Bank of Canada in Hong Kong. “Exports to the mainland have picked up, while easy
liquidity conditions there have contributed to recent gains in Hong Kong’s asset prices, providing a strong boost to Hong Kong consumers.”

The economy shrank 3.8 percent in the second quarter from a year earlier, after a 7.8 percent drop in the previous three months. The first-quarter contraction from the previous three
months was the worst since data began in 1990.

Singapore Retail Sales Post Smaller Drop as Recession Recedes

By Stephanie Phang

August 14 (Bloomberg) — Singapore’s retail sales fell the least in three months in June as the nation emerged from its worst recession since independence 44 years ago and an annual island-wide sale supported spending.

The retail sales index dropped 8.2 percent from a year earlier after sliding a revised 10.4 percent in May, the Statistics Department said today. The median estimate of 11 economists surveyed by Bloomberg News was for a 9.2 percent decline. Adjusted for seasonal factors, sales rose 2.3 percent from May.

Singapore’s economy expanded for the first time in a year last quarter as manufacturing and services improved. The government raised its 2009 export forecast this week as policy makers around the world predict the worst of the global recession is past after pledging about $2 trillion in stimulus measures and cutting interest rates.

“We should generally expect gradual improvement in retail sales from hereon,” said Kit Wei Zheng, an economist at Citigroup Inc. in Singapore. He cited “firmer signs of a turnaround in labor markets, and perhaps some positive spillovers on confidence from the buoyant property and equity markets.”

Singapore’s benchmark stock index has climbed 49 percent this year and home sales by developers including Frasers Centrepoint Ltd. rose 9.1 percent in June from May, according to the Urban Redevelopment Authority.

Singapore employers fired fewer workers last quarter, cutting 5,500 jobs compared with 12,760 in the first three months of the year, the Ministry of Manpower said July 31. The seasonally adjusted unemployment rate held at 3.3 percent.


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China steel expansion halted

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Yes, this further supports the notion that some of the world economic improvement was due indirectly to ‘one time’ inventory building and additions to capacity in China, including the eurozone, where exports nudged France and Germany to positive GDP reports.

China stops expansion projects in steel industry for three years

August 13 (China Daily) — China’s Ministry of Industry and Information Technology (MIIT) Thursday announced a three-year moratorium on approvals of new expansion-related proposals in the iron and steel industry, as the government pledges to eliminate outdated capacity.

MIIT Minister Li Yizhong said overcapacity in the steel industry was “the most evident” of all the industrial sectors, with this year’s estimated total output capacity at 660 million tons, compared with estimated demand at 470 million tons.

He called for steel mills to stop expansions for the next three years. Projects with total capacity of about 58 million tons already under construction would continue, he said.

“If the trend goes down like this, the steel industry will come to a dead end,” he said.

Another move to step up elimination of outdated capacity was consolidation of the industry, he said. Steel mills in Hebei province would reduce their overall capacity from 120 million tons to 80 million tons annually over the next two to three years.

He said the ministry was drafting steel industry consolidation guidelines aimed at reforming the world’s largest market. He gave no time for their publication.

The Shanghai Securities News reported in late July that China would release the guidelines in September.

The ministry will issue another guideline on energy conservation and emissions reductions in key sectors, including the chemical and steel sectors in the second half of this year.

The country’s steel mills produced 50.68 million tons of steel in July, up 12.69 percent year on year.


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French Non-Farm Payrolls Fall Less Than Expected

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Proactive fiscal measures, exports, and very ugly automatic stabilizers seem to have slowed the decline in employment, coupled with productivity increases that are supporting output with lower levels of employment.

French Non-Farm Payrolls Fall Less Than Expected as Slump Eases

August 14 (Bloomberg) — French companies cut fewer jobs than expected in the second quarter as the euro area’s second-largest economy exited its worst recession since World War II.

Payrolls, excluding government employees, farm workers and the self-employed, dropped by 74,100, or 0.5 percent, to 15.65 million, the Paris-based Labor Ministry said today. That was less than the 0.8 percent drop forecast by three economists in a Bloomberg News survey, and compared with a loss of 168,300 jobs in the first quarter.

“The current weakness of domestic demand and excess production capacity account for both the weakness in companies’

pricing power and the continued deterioration of the labor market,” said Caroline Newhouse-Cohen, an economist at BNP Paribas, in a report yesterday. “A lot of uncertainties are still weighing on the French economy.”

The French economy returned to growth in the second quarter as exports rose and 30 billion euros ($42.8 billion) in government spending and tax cuts introduced by President Nicolas Sarkozy helped consumer spending. Companies cut investment at a slower pace than in the two previous quarters.

Rising joblessness in France is curbing government revenue and boosting welfare spending, pushing up the budget deficit.

The budget shortfall will soar to 8.3 percent of gross domestic product next year, more than the 7 percent to 7.5 percent the government expects, according to the Organization for Economic Cooperation and Development.

France’s jobless rate hit a three-year high of 9.4 percent in June, the European Union statistics office said on July 31.

On Aug. 11, Adecco SA, the world’s largest supplier of temporary workers, reported a surprise second-quarter loss and said it will deepen cost cuts as sales decline because fewer companies are hiring. The company, based in Zurich, cut about 2,000 jobs in the quarter and told workers in France that an additional 350 jobs will be cut and 100 branches merged in 2009.

The number of temporary workers in France fell 3.7 percent in the second quarter from the first and 32.1 percent from a year earlier to 419,600, the Labor Ministry said. French monthly wages rose 0.4 percent in the second quarter from the first, when they climbed 0.8 percent, the Labor Ministry also said today. From a year ago, wages rose 2.2 percent.


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Lodging Operators Continue to Report Declines in RevPAR

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Will sleep better tonight!

>   
>   (email exchange)
>   
>   On Thu, Aug 13, 2009 at 3:14 PM, Brian wrote:
>   
>   Don’t worry Warren. Harry Reid is riding to the rescue to save the boondoggle,
>   for govt employees at least.
>   

Don’t “discriminate” plan your boondoggle today!

Finally, some help, perhaps, for Resort Cities. On July 29, Sen. Harry Reid, D-Nev., introduced a bill into Congress, The Protecting Resort Cities from Discrimination Act of 2009 (S. 1530), which will, if passed, “prohibit an agency or department of the United States from establishing or implementing an internal policy that discourages or prohibits the selection of a resort or vacation destination as the location for a conference or event.”


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Retail Sales/Claims/Import Prices/Walmart

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Karim writes:
Data supportive of the ‘low for long’ camp:

Retail Sales

  • One of biggest misses in awhile; -0.1% vs expex of +0.8%
  • Ex-autos -0.6%
  • Control group -0.2%
  • Look for early markdowns of Q3 GDP estimates

Claims

  • Initial claims up 4k to 558k
  • Continuing down 141k (prior week revised up 33k); net of extended and emergency claims -11k

Import Prices

  • -0.7% m/m and -19.3% y/y (record drop)
  • Ex-petroleum -0.2% m/m and -7.3% y/y

Walmart- Beats earnings estimates but misses on revenue

  • “We are acclerating our focus on reducing our expenses”-CEO
  • WAL-MART CEO SAYS THERE IS A `NEW NORMAL’ IN CONSUMPTION
  • WAL-MART CEO SAYS PEOPLE ARE SAVING MORE, CONSUMING LESS
  • WAL-MART U.S. COMP SALES IN 2Q BELOW PLAN
  • WALMART REDUCED U.S. INVENTORIES FASTER THAN SALES DECLINE


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ECB statements

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ECB’s Stark Says Economy May Recover Sooner Than Forecast

Stark Says State Debt May Boost Long-Term Market Rates, BZ Says

*ECB’S STARK SEES `NO BIG PROBLEMS’ UNWINDING ASSET PURCHASES

*ECB’S STARK COMMENTS IN INTERVIEW WITH BOERSEN-ZEITUNG

*ECB’S STARK SAYS RISING GOVT DEBT MAY BOOST LONG-TERM MKT RATES

*STARK SAYS ECB CONSIDERS RISK OF DEFLATION `VERY SMALL’

*ECB’S STARK SAYS MUST NOT OVERESTIMATE SIZE OF OUTPUT GAP

Higher levels of unemployment will be needed for long term price stability

*ECB’S STARK SAYS POTENTIAL GROWTH RATE HAS PROBABLY DECLINED

Higher levels of unemployment will be needed for price stability

*ECB’S STARK SAYS OUTPUT GAP MAY BE SMALLER THAN SOME THINK

Higher levels of unemployment will be needed for price stability.

*ECB’S STARK SAYS MUST BE CAUTIOUS ABOUT INFLATION OUTLOOK

*STARK: STIMULUS, INVENTORIES WON’T CREATE SUSTAINABLE GROWTH

*ECB’S STARK SAYS ECONOMY MAY RESUME GROWTH SOONER THAN EXPECTED

*ECB’S STARK SEES SIGNS ECONOMY IS STABILIZING

*ECB’S STARK SAYS RATES ARE `APPROPRIATE’


Karim writes:

Stark is also engaging in classic Fed bashing; knowing full-well that the output gap is the key driver of the Fed’s inflation model while the ECB looks at a broader series of measures and places much more emphasis on monetary aggregates


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US Consumption and Tax Policy

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Some interesting bits.

Supports my contention that we are seeing real wealth flowing upward and will continue to do so.

Note the distribution of consumption, which has been moving north as well.

Proposed tax policy won’t change any of this- higher incomes will more than offset increased marginal tax rates for the top tax brackets, and consumption will increase.

And yes, an economy can work via aggregate demand coming predominately from the top, with the bottom at subsistence levels. And we are moving in that direction.

Interestingly, as this happens the wealthy are considered ‘good’ when they hire hundreds of service people to take care of their homes, boats, personal fitness, and entertaining, etc. as they are ‘providing jobs.’

This also fits well with the export economy model our leaders are pushing hard to achieve. And the trade numbers are looking like they are succeeding. Notice the trade gap narrowing as standards of living fall.

Interesting research from ML-BAS highlighting the importance of the tax policy debate for US consumption growth and consequently US GDP:

US Consumption (Currently 72% of GDP)

  • Outlook for consumption depends on consumer outlook—on disposable income, wealth, and credit quality.
  • Wealthy (top 10% of earners) have a surprisingly high share of consumption (42%) with the middle class (40-90 percentile) composing 46% of consumption.

The US consumer as a whole is not overleveraged—the middle class is.

  • 200% debt to income and 25% debt to assets ratios are substantially higher than the wealthy’s corresponding ratios of approx. 120% and 8% respectively.

Housing wealth has a bigger impact on consumption than stock market wealth.

Wealthy have weathered the last two years a lot better than the middle class:

  • Retained employment much better.
  • Suffered lower wealth losses
  • Substantially less proportion of assets in housing.

Conclusions:

  • Overleveraged middle class burdened by real estate losses will not help consumption rebound.
  • Lower income segment has a relatively small proportion of income, suffers from a disproportionate share of unemployment which lags GDP out of a recession.
  • Wealthy –with modest leverage, near full employment, and experiencing a faster rebound in their wealth should lead consumption if all else stays the same.
  • However, reliance on government borrowing has increased as a result of addressing the credit crisis as well as the potentially ambitious health care reform bill.
  • Rising taxes (especially the “soak the rich” policies that are on the table) may offset potential consumption growth as the most important determinant of consumption is after tax income.
  • The outlook for tax policy on the top earners may provide a key swing factor to the consumption outlook.


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Trade/FOMC Preview/China Exports/Stimulus hangups

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Karim writes:

Trade: Exports up 2%, Imports up 2.3%. Imports ex-petroleum down 1% and consumer goods imports down 4.8%. Sector strength mainly in industrial goods (restocking), but indicators of final demand still look weak.

Don’t look for dramatic changes to FOMC statement; major focus will be on Treasury purchase language.

1) Econ assessment will turn slightly more positive; May mention signs of a nascent recovery, though underlying demand likely to remain weak for the foreseeable future. Inflation will remain subdued.

2) Exceptionally low FF rate for an ‘extended period’ will remain. I’d expect this phrase to be dropped about 3-4mths before they’d actually hike, with the first move possibly being a hike in the rate they pay banks on excess reserves.

3) Likely to indicate that Treasury purchases will not continue once the $300bn level has been reached, though they may restart the program in the future if needed. Language on other credit easing programs to stay intact.

China’s export model showing little bounce (latest data last night)

Some hangups with the stimulus package (courtesy of American General Contractors):

“President Barack Obama’s stimulus spending has run into a problem: A shortage of General Electric Co. water filters,” Bloomberg News reported on Thursday. “GE makes them in Canada. Under the program’s ‘Buy American’ rules, that means the filters can’t be used for work paid for by the $787 billion fund. Contractors are searching the U.S. in vain for filters as well as bolts and manhole covers needed to build wastewater plants, sewers and water pipes financed by the economic stimulus. As officials wait for federal waivers to buy those goods outside the U.S., water projects from Maine to Kansas have been delayed….the Environmental Protection Agency, which administers the water funding, has granted six waivers and has 29 petitions pending….The rules affect water projects most because highways and bridges have been constructed under Buy American regulations for the past 30 years, and not much stimulus money has been spent so far on public housing and schools, said Chris Braddock, the U.S. Chamber of Commerce’s associate director for procurement.”

“Gun-shy [school] administrators might undermine a federal stimulus program that encourages school construction by helping districts pay down debt,” the (Wisconsin) Daily Reporter reported on Monday. “Some district leaders say they gladly are accepting a piece of $125 million in no-interest bonds but are reluctant to invest the savings in new projects. ‘The climate out there is terrible and with the cuts made in the state budget, it’s just really difficult right now,’ said John Whalen, president of the Sun Prairie Area School District Board of Education. ‘I don’t anticipate this will encourage us to do more projects,’ he added. The district received $23 million in federal bonding, more than any other district in the state, though the bonding did not encourage additional construction. Sun Prairie used it to help pay off the $30 million it put on taxpayers for construction of a new high school and conversion of the old high school into a middle school. Both schools are scheduled to open in fall 2010. While Sun Prairie stands pat, other districts might jump at the opportunity. The School District of La Crosse received $6.6 million in bonds to help pay off debt from $18.5 million in expansion, renovation and upgrade projects.”


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Zombie Economy: European Industrial Production Unexpectedly Declines

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Looks to me like the world hit a ‘soft spot’ in July, maybe due to the winding down of China’s suspected ‘inventory building.’

CPI’s continue to fall in the Eurozone indicating continuing domestic demand weakness.

Strong productivity gains are not being matched with fiscal adjustments to sustain output and employment, as evidenced by a continuing rise in unemployment and a widening of the output gap.

I like the term Zombie economy as the world continues to unknowingly rely on ‘automatic stabilizers’ for a very ugly means of fiscal adjustment.

Meanwhile, as unemployment continues to rise, they wait, with blind certainty for the mythical ‘kicking in of billions’ by Central Banks to somehow take effect, and be so powerful, that they are spending their time debating irrelevant ‘exit strategies’ from this non event for aggregate demand.

Right now there is no hope for further US fiscal adjustment, barring a major economic setback. President Obama has pledged not to sign a health care bill that is not ‘revenue neutral’ and it’s all but certain marginal tax rates will rise next year.

And the increased expenditures for ‘shovel ready’ projects, merits of the projects aside, are being offset by forced cut backs by States that continue to face revenue shortages due to the fall in GDP.

Banks that have been sustained by wide net interest margins that offset lingering loan losses are now seeing portfolios run off, as those with positive cash flow (corporations with flat sales and consumers in foxholes still worried about job losses) are paying down debt and net new lending languishes.

  • European Industrial Production Unexpectedly Declines
  • Liikanen Says Next Months Will Show If Euro Area Through Worst
  • French Consumer Prices Fall for Third Month on Energy, Retail
  • European Government Bonds Extend Gain After BOE Inflation Report


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