“Good Evening Sir! Here is your “Economic Recovery” pizza, earlier than our marketed 1-year delivery guarantee.”
“Thanks mate. Keep the change”.
We’ve seen a trend of positive data lately, as economic reports are showing some improvements. Stock markets are rising globally, up 30% since last March. We are seeing money flow out of the yen and the dollar – and going into commodity currencies! Check your charts, the loonie and the Aussie have risen by 18% and 31% since last March! At the same time the “anti-dollar” (ahem, I mean the euro), is approaching December prices levels.
Economic reports have also been showing some positive signs. PMI reports have been rising globally, especially in Europe. Housing data from the UK is showing that the housing industry appears to be stabilizing. Australia even avoided a technical recession, with a GDP report indicating 0.4% growth. It appears the people believe that the recession is bottoming out. So the question to ask is, is it REALLY over?
We are seeing all these improvement in certain economic data but later we find out that they are revised lower. Some experts and market-watchers are saying that the government has been data downwards more often in the recent periods. In a way, they are implying that initial figures that came out were simply buffed up for political reasons. Of course, there’s also the possibility that these were just oddities that tend to happen when an economy is in transition.
Let us take a look back on the differences between reported and revised data in the past.
Examine the US non-farm payrolls. The US NFP report garners a lot of trader attention as it has shown to be highly predictive of government data released a couple of days later. The NFP employment change for April printed that 539,000 people lost jobs, better than the 590,000 expected. Consider that statement void as the “actual” figure was revised down to a whopping 699,000 lost jobs! People had taken this as a positive sign that labor markets were improving. Um, isn’t half a million job losses still half a million job losses? Kind of hard to be optimistic about that.
Here’s another one: US core durable goods orders. The “actual” US durable goods figure for April stood at 1.9%, much higher than the 0.1% predicted. Later, it was revised down to -2.1%, a complete turnaround from the initial figure. The headline figure, which includes transportation items such as cars, was revised to-2.1% from -0.8%.
It doesn’t end there. Core retail sales also shared the same tone. In April, the Census Bureau printed a 0.9% decline which was later changed to -1.2%!
What we see here is good data that the media, investors and traders eat up as signs that the recession is turning, but are later revised to show that things are still pretty gloomy. Moving on, let’s take a look at other data that has been released.
First quarter GDP reports carry no hint of optimism. The US posted its third consecutive quarterly GDP contraction while Canada reached its second straight GDP decline. In Japan, economic activity slowed by 4%, its biggest quarterly GDP contraction ever! While the GDP is a lagging economic indicator, the recent data suggests that the world’s largest economies appear to be digging a deeper hole.
The labor market is miles away from a recovery, with unemployment rising all over the globe. Weaker employment implies lower personal incomes and thus reduced spending. Who wants to spend if they might lose their jobs? If this persists, then economic activity will continue to contract. In the UK, we have seen the unemployment rate jump from 8.9% to 9.2% in April while the jobless rate in Canada is expected to climb from 8.0% to 8.3% this month. US unemployment is forecasted to rise from 8.9% to 9.2%, largely a result of General Motors bankruptcy filing which caused it to shed more than 21,000 factory jobs.
Not only has the recent GM bankruptcy injured the US labor market, it also casts a dark cloud on the nation’s sales and industrial production. Retail sales dropped 0.4% in April after a 1.3% decline in March, confirming unemployment fears are prompting consumers to hold on to their money (in fact, recent reports have also shown that the savings rate is up). Across the globe, industrial production has already been falling, with worse-than-expected declines in both Euro-zone and UK.
So, what exactly is happening here? We are seeing some positive data from some reports, only to be revised down. We see lots of bad data in key reports, only for investors to eat up the “not so bad” news. Heck, even swine flu can’t stop risk appetite!
As of now, it is too early to say what will happen. In the words of my barber (they tend to always have pearls of wisdom don’t they?) – “These are unprecedented times – we just don’t know what will happen.” It is difficult to say whether the storm has passed as it is still raining outside. For the time being, I’ll just be patient and wait for my pizza to arrive. Maybe when the rain stops, that’s when I can have a picnic outside and enjoy the meal.