Bull and bear: US economy serves an ace - The Share Centre Blog

Please remember: Our website can help you make informed decisions, not provide personalised advice. If your investments fall in value, you could lose money.
Tax allowances and the benefits of tax-efficient accounts could change.

Michael Baxter

Bull and bear: US economy serves an ace

Written by: Michael Baxter on May 7th 2013

Category: Bull & Bear, News

Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories include: US economy serves an ace. Eurozone staggers along bottom. Indonesia sees growth slow, but even so…Nikkei hits five year high. Australia cuts interest rate to record low

US economy serves an ace

Last week it was told as if it was a tennis match. There has been a lot of news about the US economy. And on Friday we saw some more. Put it all together and we get an interesting story on how the US economy is performing at the moment. So, is the performance good or bad?

The game adjourned on Thursday, with bull leading 30: 15. You may recall that first there was news on US GDP in Q1 – it expanded at an annualised rate of 2.5 per cent. So that’s 15: Love to Bull.  Then there was news that US consumer confidence, according to the Conference Board, had lifted – 30: Love. But Bear got a point back with the latest PMI on US manufacturing, showing a fall in the index.

Friday saw two more points being played.

First there was the latest US jobs report, and this really was good news indeed. You may recall that last month the report was a disappointment, showing an increase of just 88,000 in non-farm payrolls. That was the worst monthly rise in some time, and compared with an increase of 268,000 in February.

So it was with trepidation that markets prepared for the next jobs report. Well it exceeded expectations. Not only did April see a 165,000 rise in non-farm payrolls, but the figures for February and March were revised upwards to 332,000 and 138,000 respectively. So spectacular was this news that it is tempting to award the US economy two points for it. But you can’t do that. The rules of the game are clear. You can serve a wonderful ace, or a brilliant cross court volley, but you still only win one point per rally. So, after a brilliant point by Bull, the score is 40: 15, or game point.

All that leaves then is to find out what the latest PMI on US non-manufacturing had to say. The index was down – a lot in fact – from 54.4 in March to 53.1 in April. That was a nine month low for the index. The index tracking employment fell sharply too, suggesting future jobs reports may not be quite so rosy. When combined, the PMIs on manufacturing and non-manufacturing suggest the US is now expanding at an annualised rate of 1.5 per cent.

So the score: 40: 30 to Bull. It is still game point, but.. we are going to have to wait a bit longer for more news, before we can award victory.

Eurozone staggers along bottom

Have you caught those headlines, perhaps out of the corner of your eye? The euro is getting better; it is on the slow march to recovery. Typically, such stories have their roots in the rhetoric of some European politician. The snag is that when you drill down into the data, it is very hard to see any semblance of truth in such optimism.

The latest Purchasing Managers’ Index tracking services, and the composite index combining services with manufacturing tell the story.

The Services Business Activity Index did at least manage to improve on March’s dismal effort, rising from 46.4 to 47.0. But then again the March reading was a five month low, and the index has been below the 50 no change mark for 15 consecutive months. A more forward looking indicator, tracking new business fell to a 20 month low.

If that isn’t bad enough, the services PMI for Germany, suggests the services sector in Europe’s biggest economy may be in recession.

Now let’s take a look at the composite PMIs: these are the indices that give combined scores for manufacturing and services. Here is the story in numbers:

Ireland                  52.2                        2-month high
Germany             49.2                        5-month low
Italy                       46.6                        19-month high
France                  44.3                        4-month high
Spain                     44.0                        4-month low

The composite PMI for the euro area was 46.9 a four month low.

So what can we say? If these PMIs are even vaguely accurate, it means the euro area is still very much in recession, and there are not even hints that it is close to pulling out.

Still, as was told here on Friday, at least the PMIs for the UK were a bit more encouraging. See PMIs point to fastest growth in eight months

Indonesia sees growth slow, but even so…

In Q4 the Indonesian economy expanded by 6.1 per cent. Not bad at all. In Q1 of this year, the economy slowed, and growth dropped all the way from 6.1 to a mere 6.0 per cent expansion.

The Indonesian economy is being hit like a feather thundering into a tank by slowing exports and weaker commodity prices.

But Indonesia has one thing going for it that even China can only envy. Growth is domestically driven. Exports are worth 25 per cent of GDP, which is modest for South East Asia. In the latest quarter, household spending rose 5.2 per cent and investments by 5.9 per cent.

The economy has now expanded by between 6 and 7 per cent for ten quarters in a row.

The Indonesian government has a target for the economy to growth four-fold between now and 2025.

Nikkei hits five year high

Time was when the Nikkei seemed inexorably on course for 40,000. Between December 1987 and December 1989 the index had risen from 21564, to a smidgeon short of 39,000. Japan was unstoppable. You could even see it in Hollywood. There was the Japanese presence emerging in US films. Why, even the Bruce Willis Film ‘Die Hard’ featured a brave, very articulate, and obviously intelligent Japanese business man who was Willis’ wife’s boss. Back then of course, the baddie was British – more often than not played by Alan Rickman. Japan was on an unstoppable course for overtaking the US as the world’s economic superpower. To illustrate the point, the land below the Emperor’s place was worth more than all the real estate in California.

Of course, these days such arguments seem daft. Japan was a bubble.

But that was before the days of Shinzo Abe. Japan’s prime minister is doing all those things people have been telling Japanese prime ministers to do for years. Except – well, keep this one quiet –so far we have seen more talk than action from Mr Abe. His rhetoric says stimulus and QE big time. The reality says, well let’s wait and see.

The markets have bought into it, however, and this morning the Nikkei 225 hit a five year high, passing 14,000.Good stuff, maybe.

Just remember that thing about the Nikkei being on a one way street to 40,000 23 years ago.

Australia cuts interest rate to record low

A rate of interest of 2.75 per cent might not seem that low to us here in the UK, but cast your mind back to the heady days pre 2008. Back then an interest rate that low would have been, well… too good to be true.

Now the Australian central bank has cut interest rates to 2.75 per cent, a record low.

In September 2008 the Australian interest rate was 7.0 per cent. It was lowered to 3.0 per cent in May 2009, before the central bank began to tighten and upped rates again. Rates have now fallen by 2 percentage points since October 2011.

In Australia unemployment is 5.6 per cent and inflation 2.5 per cent. Then again, unemployment at 5.6 per cent may seem good by European standards, but it is in fact at a three year high. The latest PMI for Australian manufacturing has fallen to a record low.

Australia’s big problem is reliance on mining. Commodity prices are under pressure, hence a crisis in Australia that by British standards is not really a crisis at all.

What the economy from Down Under needs is more balance. The cut in rates may help, but more are likely to follow.

In the UK we have problems galore, but at least interest rates are near zero – but of course we risk seeing a bubble. In Australia the good news is that there is no need for rates to be anywhere near as low as they are in Europe. And for as long as the talk is about cutting rates by a few points from 2.75 per cent, the economy looks distinctly normal. And in an abnormal economy, that is rare indeed.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: Australia rate of interest, Eurozone economy update, Indonesian economy, Nikkei 225 five year high, PMIs eurozone, US GDP US PMI services, US jobs report

Filter view