Daily Economic Briefing: February 23, 2010

Daily Economic Briefing: February 23, 2010

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Page 1 of 3: Global data summary

• The Conference Board’s measure of US consumer confidence tumbled 10.5 pts in February. This may be related to the stumble in the stock market and the political turmoil that contributed to it. The S&P500 is on course to fall over 3% this month, breaking a streak of 10 consecutive monthly gains that fostered a powerful recovery in household net worth. That said, it is curious that the University of Michigan’s preliminary February survey did not register much of a drop. A final UofM reading for February is due Friday. The labor market details of the report suggested that the 0.3%pt fall in the unemployment rate in January will be followed by no change or a small increase in February.
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• The firming in US house prices also has boosted household net worth. Today’s report from Case-Shiller showed that their 20-city composite index rose 0.3%m/m (sa), the 7th straight increase. The C-S measure rose at a 6% annual rate in 2H09.
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• European data continue to be lackluster. The German IFO fell 0.6pts in February, breaking a string of consecutive increases dating back to last April. Comments from IFO suggest that adverse weather hurt sentiment; however, the increase in the construction subset seems to contradict this view. Belgium’s BNB index was stable last month. We tend to downplay these sentiment surveys in favor of the Euro area composite PMI, which measures the change in business activity from one month to the next. It was unchanged at 53.7, a level consistent with near 2% growth in GDP.
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• French goods consumption skidded almost 3%m/m in January. The decline came in response to a 19m/m (sa) decline in car sales, as the government scaled back its sales subsidy from 1000 euros to 700 euros. Unit sales were down about 8% across the Euro area in January vs 4Q (not annualized), creating a headwind for January consumption across the region. France’s CPI report showed that core inflation fell from 1.2%oya to 1.0%oya in advance of Friday’s Euro area release.
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• Yarkin Cebeci revised down his 2010 GDP growth forecast for Turkey from 5.0% to 4.3%. The move is in response to softer than expected domestic demand data and the sluggish recovery in the Euro area. Most importantly, we no longer expect an IMF deal. Thus, potential benefits such as better investor sentiment and lower rollover rates will not be realized.
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Global retail sales moderate in late 2009 but to a still healthy pace

Global retail sales growth slowed at the end of last year, according to our global proxy derived from data of 20 countries plus the Euro area. This deceleration was to be expected as various government stimulus programs—in particular auto sales incentives—expired in several countries in late 2009. Indeed, it is encouraging that global retail sales have settled into a still respectable pace of growth (at roughly the 2000-2009 average) even as these sales incentives have started trailing off. That said, with many sales incentives’ expiration dates in 4Q09-1Q10, it will take several more months of data to get a “clean” read on the underlying trend of retail sales.

As of the end of last year, the rebound in goods consumption was broadly based across countries, with improvement evident everywhere. However, Europe seems to have had less of a rebound than elsewhere. While the exclusion of autos from Europe’s retail sales data complicates the comparison, Euro area and Emerging Europe retail sales stand out as being weak. Euro area retail sales have yet to return to growth on a trend 3m/3m basis, and in CEEMEA sales roughly stalled in 2H09. This tepid recovery in Europe is consistent with NIPA data, which also show a lagged pickup in European consumption and GDP compared to elsewhere.

The deceleration in global retail sales highlights the degree to which recent demand has been spurred by government incentives and the need for a further rise in labor income growth if the recovery is ultimately to become self-sustaining. Our forecast calls for a pickup in hiring this year as businesses gradually turn more expansionary. The recent rise in business investment and the firming in global labor markets is evidence that such a shift in business behavior is under way.

Further, the rebound in final goods demand—both retail sales and capex—will continue to put upward pressure on production for many months to come. Based on our final sales proxy, derived from global retail sales and G-3 capital shipments data, the level of industrial production remains below the level of demand, implying that firms’ inventories are still falling on average globally. Businesses will have to close this gap and eventually raise the level of output above sales to stabilize inventory-sales ratios. This continued increase in production should induce more hiring and help promote a lasting economic recovery. (See charts and table on next page.)

Page 3 of 3: Correction to February 16 DEB

Page 2 of the February 16 DEB had a discussion of the banking sector’s cross-border claims on the Euro area economies currently under the most fiscal stress. Included in that discussion was a chart showing the total debt of these economies as a percent of GDP and a decomposition of that debt into its external and domestic components. The total debt figures were correct but the decomposition was incorrect. The chart reported here is the corrected figure. Also included are the underlying data. The gross external debt data are provided by the Joint External Debt Hub, a joint venture between the BIS, IMF, and OECD. The total debt figures are total gross government debt are provided by the OECD. Domestic debt is defined as the residual.

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ENDS

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