Daily Economic Briefing: May 3, 2010

Daily Economic Briefing: May 3, 2010

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• The US ISM manufacturing survey surged to an expansion high of 60.4, with the orders, output, and inventory indexes collectively pointing to very rapid production gains both in April and in the next few months. The ISM employment index vaulted to 58.5; the index has rarely been higher in recent decades, suggesting that job growth is heating up in the factory sector.

• Our global PMI will not be released until tomorrow because a number of country reports were delayed by holidays. None theless, with the US, Euro area and Japan manufacturing PMIs all posting gains of about 1point last month, our global PMI likely advanced by about the same amount. This would put it near the series high of 57.9 set in May 2004 (recall that the global PMI dates back to 1998). Notably, new orders indexes rose in the G-3 while the inventory indexes pulled back; the resulting rise in the orders/inventory ratio signals very strong momentum in the PMI and in actual production growth through midyear.

• US real consumer spending rose 0.5%m/m for a second month in a row in March. The gain capped a 3.6% annualized gain in 1Q—the strongest in three years—and creates a trajectory that is favorable for a similar gain in the current quarter (JPM: 3.3%). The growth of spending again outpaced income, producing another decline in the personal saving rate to 2.7%. However, it is worth noting that the income data are subject to significant revision as better source data become available. Updated figures for 4Q09 will be published on May 27, however, we will have to wait until August 27 to learn if income was undercounted in 1Q, when the saving rate hit the skids.

• US light vehicle sales disappointed expectations last month, dipping to 11.2mn units (saar) from 11.8mn in March. This will take a bite out of April consumer spending, although Mike Feroli says an increase in appliance spending (due to the government’s “cash for appliances” program) will help to offset this.

• Euro area governments and the IMF agreed on a multiyear support package for Greece totaling 110 billion euros. This funding will keep Greece out of the capital markets for the next few years and thus minimizes the near-term chances of a default. We view this step as a necessary condition to calm fiscal stress in the region That said, the amount of fiscal tightening needed to stabilize Greece’s debt-to-GDP ratio is very large, leaving its ultimate solvency in doubt. Although their debt positions are less onerous, Ireland, Portugal, and Spain also face severe belt tightening over the next few years.

• The latest round of lending surveys shows that G-4 banks have begun to ease terms and standards on loans (page 2).

G-4 bank lending standards begin to ease

The recession produced an unprecedented decline in bank lending in the major developed economies. This decline resulted from inward shifts in both the supply and demand curves for bank credit. The latest survey data, which were conducted in March (BoE, BoJ) and April (Fed, ECB), point to a steadying in these supply/demand curves. Indeed, banks have begun to unwind some of the tightening instituted during the recession. For a second quarter in a row, G-4 banks eased terms and standards on loans to large and small companies, while they have stopped tightening terms on loans for home purchase. These same surveys indicate that loan demand is still falling, although at a much reduced pace.

Although both the level and the change in credit standards might have a significant effect on the growth of spending, an examination of data in the US, where there is more history available, suggests that it is the change in standards that matters most. As such, the recent move to ease standards on business loans bodes well for the economic recovery.

ENDS

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