Daily Economic Briefing: April 1, 2010

Daily Economic Briefing: April 1, 2010

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(the attached PDF includes charts and tables)

• The manufacturing PMIs delivered strong gains in March, with our global index rising 1.3 pts to 56.7. The March reading set a new high for the expansion and is just a point below the series high dating back to 1998, when we began keeping records. The output and orders components of the global PMI rose to near 59, consistent with robust growth in global factory production in the near-term of at least 7% annualized.

• Equally important in the global PMI survey were the signs of positive spillover from the extended run of strong production gains. After having shed jobs and inventory throughout 2009, companies are shifting to expansion mode. The global PMI employment index has been above 50 for three months in a row, reaching a new recovery high of 52.0 in March. Likewise, the PMI purchased inventory index (as distinct from inventory of work-in-progress and finished goods) vaulted above 50 in March. The available indexes of finished goods inventory have not reached 50 yet, nonetheless, the chances are that companies will begin building stocks this quarter. The additional progression of the inventory cycle will continue to boost demand and production in coming months, above and beyond the growth of final sales.

• US initial jobless claims fell 6,000 to 439,000 in the week ended March 27 from an upward revised 445,000 in the week before. The past few weeks of data raise hope that claims have moved into the 430,000 to 450,000 zone that we think is consistent with private sector job growth in excess of 100,000 per month, which is our forecast for 2Q. Mike Feroli warns that next week's claims could be volatile: over the last decade first prints of initial claims on the Good Friday week swung by an average of 24,000.

• As we have been signaling in the DEB and other publications, our Japan team raised its forecast for 1H10 Japanese GDP growth today. Growth in 1Q10 was revised up a lot, from 1.8%q/q, saar to 3.5%; for 2Q, the revision was from 1.5% to 2% After a year in which GDP growth averaged an estimated 3.2% annualized, our team sees growth moderating to close to 2% in coming quarters on the back of reduced fiscal stimulus to consumption and public works and a more modest contribution from net trade. This is still above consensus and our estimate of potential growth.

• German retail sales dipped 0.4%m/m in February, leaving the Jan/Feb average 1.4% annualized below the 4Q09 average. Combined with data on car sales, it appears that consumption spending fell substantially again in 1Q10. The prospects for the current quarter look better: weather disruptions are behind us, car sales increased in January and February, the labor market is improving, and the March business surveys jumped.

• As discussed in this week’s GDW essay, we are reassured to see that global financial market conditions not only remain growth-supportive, they have improved in recent months through the turmoil in the real economy and in geopolitics. That said, one unwelcome although not necessarily surprising development is the recent climb in oil prices. The front-month WTI crude contract is trading up another $1 at this writing, just shy of $85/bbl. If this move builds on itself it will pose an unexpected headwind to consumer spending this quarter.

Page 2: Global manufacturing PMI sets new expansion high in March

The J.P. Morgan global manufacturing PMI rose 1.3 pts 56.7 in March, setting a new high for the expansion. The March reading is the highest since May 2004 and is just a point below the series high dating back to 1998, when we began keeping records. Every component of the PMI rose in March. The output and new orders indexes returned to just under 59, consistent with very rapid growth in output. Under the old rules of thumb, the current level of the PMI output index would point to 7% annualized production growth; based on the recent experience, this level of the PMI index points to double-digit production gains. The export orders index surged 2 pts to 58.4, a series high, which is mirrored in the booming pace of exports, which were tracking 40% annualized growth (%3m/3m) as of January.

As the PMI has gained ground in recent months, what has been notable has been the rotation in the drivers of the advance. In the early phase of the recovery, the PMI composite was taken up by the orders and output components, whereas the inventory and employment indexes lagged behind. These lags probably had both a stock and a flow explanation: manufacturers probably were over-stocked in terms of inventory and employment when they began to raise production, so they continued to shed these resources; in addition, they probably were not counting on a sustained upturn in demand and production and thus were reluctant to add resources once this stock adjustment was completed.

The message of the past few PMI surveys is that companies are shifting stance and now want to increase employment and inventories. Thus, the PMI employment index crossed above the 50 mark in January and subsequently reached 52.0 in March, signaling solid growth in manufacturing employment. Similarly, the PMI inventory index leaped above the 50 mark in March, adding 2.6 pts to a level of 51.4. This is a record high for this series.

Concerning the inventory index, it is important to understand what it measures. The global PMI inventory index tracks the stock of purchased goods—as distinct from the inventory of work-in-progress or finished goods held by a company. The US ISM index only queries firms about their materials inventory, which limits the scope of the global tally. However, outside the US, however, most PMI surveys separately ask about (i) purchased inventory versus (ii) finished goods inventory. What we learn from these latter PMIs is that while the indexes of purchased inventory are quite elevated around the world, the indexes of finished goods inventory are closer to their long-term averages. This creates some ambiguity about exactly where the manufacturing inventory cycle stands. Our best guess is that aggregate manufacturing inventories were bottoming in 1Q10 but that widespread restocking had not yet begun.

Summing up, this month’s global PMI survey shows that the manufacturing boom was maintained through March. Moreover, it is now generating broad positive spillover to the economy. The extended run of strong demand growth, and the production boom this has fostered, is now compelling manufacturers to raise employment and soon to begin building inventory. The upturn in manufacturing employment is boosting household income growth, and thus consumption, which feeds back positively on production. At the same time, the need to shift to a position where inventory is growing in line with sales (i.e., to stabilize inventory/sales ratios) means that the inventory cycle will continue to add to the growth of demand and production in coming months, above and beyond the growth pace of final sales.

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ENDS

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