Another favorable Fed manufacturing survey this morning, this one from the Dallas branch, which reports that all indicators of factory activity in the state of Texas are pointing upwards.
As Calculated Risk notes, this makes five out of six favorable Fed manufacturing surveys for the month of November, with the Empire State (New York) survey the only exception:
We’ll have more on global manufacturing activity on Wednesday, when guest editor Jonathan Wilmot of Credit Suisse will track 21 PMI releases from around the world.
But to stay in the US for now, in the last couple of weeks we’ve noticed a few persuasive arguments that growth next year will be better than the bears are expecting — or at least above the 2.5 per cent at which GDP grew in the third quarter, and which is also the same rate at which the latest survey of professional forecasters expects the US economy to grow for all of next year.
And as we tend to be a pessimistic bunch here at FTAV, we think it’s only fair to highlight some of them.
First, on top of the better-than-expected-but-still-mixed payroll numbers for October, CR rounds up a few of the indicators that have come out favorably in the last month or so:
• The Personal Income and Outlays report for October indicated incomes grew at a 0.5% rate (month-to-month), and it appears PCE has grown at about a 3% annualized rate over the last three months. The personal saving rate was 5.7% in October, and although I expect the rate to increase a little more – it appears a majority of the adjustment is behind us (a rising saving rate is a drag on personal consumption).
• The 4-week average of initial weekly unemployment claims has declined to 436,000 last week from over 480,000 at the end of August. The weekly reading was 407,000 last week; the lowest since July 2008.
• Most regional manufacturing surveys, with the exception of the NY Fed survey (empire state), has shown a pickup in manufacturing. This suggests the manufacturing sector is still improving (the ISM manufacturing index for November will be released on Wednesday).
• Trucking and rail traffic improved in October, although the Ceridian diesel fuel index was weak.
• The Architecture Billings Index (a leading indicator for commercial real estate) is near flat – suggesting investment in commercial structures such as hotels, offices and malls will stop contracting next year. (addition by subtraction!)
• Even small business optimism has improved slightly.
Next, Greg Ip of The Economist finds that the process of deleveraging is further along than f0recasters may have noticed. He recognises the recovery still faces significant headwinds, but reckons they are blowing less stiffly:
Over time, the headwinds of consumers paying down debt will fade. The process is about halfway done. Personal saving had already risen to 6% of income by the summer of 2010, from under 2% in 2005. Some optimistically reckon that’s as high as it needs to go. Meanwhile, household debt peaked at 135% of disposable income in late 2007; by the middle of 2010 it had fallen to 123%. Economists at Deutsche Bank project that, if the saving rate stays at 6%, banks continue to write off bad loans at their current rate and income grows by about 4.5% a year, that ratio will be down to 107% by the end of 2011.
If this debt-reduction is gradual enough, households can save more and spend more at the same time. However, this assumes that they are not hit by some shock to their incomes, such as a rebound in unemployment, a large increase in taxes, higher interest rates or a new surge in oil prices.
Casting his gaze more widely, Wilmot notes in a recent FT Alphaville post how closely the recovery in world wealth has tracked the 2003-04 recovery:
First, most of the hard data, as well as risk appetite and world wealth are all pointing in the same direction: we are on the threshold of moving from rebound to expansion, which is exactly the moment one would expect recovery to broaden out somewhat in the developed world.
And second, should the eerily close parallel between this world wealth cycle and the last continue to hold, world wealth will be up more like 12-14% than this year’s 8-9%, but likely with developed equities and global M&A the main driver of excess returns rather than credit, core government bonds and emerging equities, as we had this year. And who knows, it can’t even be ruled out that peripheral eurozone debt – if it hasn’t blown the system up – surprises us all by starting to come back from the dead.
Now we would not call that heaven exactly, given how far we are from full employment and how much painful adjustment remains to be done in the public sector and in some parts of the financial sector. But it would take us further away from the potential hell of debt deflation and depression that would ultimately put globalisation itself at risk.
We remain agnostic on all of this. The above arguments all make sense, and we suspect that the FOMC’s revised prediction range of 3-3.6 per cent US GDP growth is closer to the mark than the 2.5 per cent noted above. (And none of these mentions the impressive profits that US corporates have been generating since early last year.)
But the recovery is also fragile, and extremely vulnerable to further negative shocks. Consider some of the items on the list of such potential shocks that David Rosenberg offered just this morning: policy tightening in China, the European debt crisis, a bursting of the Canadian housing bubble, and so on. There is also the potential for a stagnant or even declining housing market next year, a crisis in municipal finances, not to mention shocks that haven’t yet been anticipated — and nobody has figured out how to make companies spend their cash piles.
Even if GDP does grow above 3 per cent, keep in mind that the enormous amount of slack in the economy means it will eventually have to accelerate well above even the high end of the expected range to return unemployment to normal levels.
Still, with the conversation in Europe currently dominated by fears of multiple sovereign debt crises, at least the trends on this side of the Atlantic appear to be moving in the right direction.
Related links:
Jonathan Wilmot: Heaven or hell in 2011 – FT Alphaville
More on those “record” profits – FT Alphaville
OECD: it won’t be us leading the recovery – FT Alphaville