Daily Economic Briefing: March 3, 2010

Daily Economic Briefing: March 3, 2010

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• Our global services PMI rose 1.4 pts to 52.6 in February. This is an encouraging sign, because the services PMI has been very depressed relative to its manufacturing counterpart, consistent with a narrowly-based, although reasonably strong, economic recovery. Indeed, the main message of this month’s global PMI surveys was one of rebalancing. First, because of the move up in services relative to manufacturing; second, because of the increases in the employment and inventory components, which show that the sustained recovery in output and corporate earnings has encouraged companies to shift away from cost-cutting. What remains to be seen is whether businesses are poised to turn expansionary in the months ahead, as we forecast.
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• Although Friday’s US employment count will be hit by adverse weather, the balance of the available indicators suggests that private payrolls are edging into growth territory. The ISM composite employment index, which moved above 50 in February for the first time since December 2007, is now pointing to modest job growth. The 4-week moving average of initial jobless claims is giving the same message. The ADP report is lagging a bit behind, finding that private payrolls fell 20K last month. But if the outcome was dented at all by weather, the underlying figure probably was a gain.
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• The Greek government announced additional fiscal tightening in 2010 amounting to about 2% of GDP. Our belief is that this action, and European support for it, ensures that Greece will be able to fund itself on acceptable terms for the time being even without more explicit European support. But the political situation remains fluid, with the Greek PM set to meet his French, German, and American counterparts in the coming few days.
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• Car sales fell modestly in the developed world in February. Sales dipped 0.4mn (saar) in the US and 0.2mn in Japan, but were stable in Western Europe. Weather and the problems at Toyota hurt sales last month, along with the phasing out of government sales incentives. All that said, at 29.6mn, our DM car sales proxy stands almost 3mn, or 10% above the level a year ago, when incentives began to get rolled out.
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• The improvement in Japan’s labor market is extending to compensation. After having stabilized in 2007, contractual wage rates (which exclude the volatile bonuses category) fell sharply from the middle of 2008 through 2009. However, the latest data show that as employment has firmed (it has stabilized or is growing modestly, depending on the survey), wage rates are leveling off. In sum, the labor income picture in Japan, while soft, is showing significant improvement.
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J.P. Morgan all-industry PMI: An encourging move up in services

J.P Morgan’s all-industry PMI output index—which is a proxy for global GDP growth—rose slightly to 53.6 in February from 53.2 in January. Taken at face value, the February level would appear to be consistent with GDP growth of about 2.6% annualized. However, the global PMI undershot GDP growth by an average of 1.4% pts over the three quarters from 2Q09 to 4Q09. This track record suggests that global GDP growth may well top 3% this quarter.

The manufacturing and service sector PMIs moved in opposite directions last month, which accounts for the small change in the all-industry PMI. The global manufacturing PMI retreated in February, although the latest survey was very strong, especially the output and new orders components. Moreover, the continued advance of the manufacturing PMI’s employment and inventory indexes heralds a new phase of the industrial cycle.

Whereas the global manufacturing PMI has been sitting at a high level for many months, the recovery in the services PMI has been gradual and disappointing. The good news is that the global services PMI advanced in February; the bad news is that its current level remains quite low in relation to the manufacturing PMI and the likely growth rate of global GDP. In a recent research note (“Global PMI not capturing full strength of economic recovery,” Global Data Watch, Jan 29, 2010), we suggested that the services PMI might be understating growth for two reasons. The first is that because the services PMI measures “business activity” rather than output, it may fail to capture important shifts in inventory management. This is most problematic in the US, where the “services” PMI is actually a nonmanufacturing survey that includes businesses with considerable inventory operations. The second potential source of error is that the PMI diffusion index measures breadth instead of depth. It may well be the case that the economic recovery is strong but narrowly focused, which is less desirable than the alternative. That said, it will be important to watch for a move up in the global services PMI in coming months as a signal that the expansion in broadening.

Encouragingly, the global PMI employment index continued to recover in February, reaching a level of 49.2, which is consistent with slight gains global employment. Indeed, official employment data, which are less timely than the PMI, already confirm that employment has leveled off. Considering that wage growth is positive in most countries, these conditions imply moderate growth in labor income, and thus better fundamental support for the growth of consumption. That said, job growth needs to turn much more positive to complete the transition to self-sustaining growth.

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ENDS

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