Daily Economic Briefing: March 24, 2010

Daily Economic Briefing: March 24, 2010

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Page 1 of 3: March 24, 2010

• Our forecast calls for a temporary downshift in global growth this quarter due in part to unusually harsh winter weather in the US, Europe and parts of Asia. Global growth is expected to pick up again in 2Q as the weather normalizes and as latecomer Europe finally joins the recovery.
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• The recent global data flow generally supports this forecast. Data and surveys clearly show the imprint of weather in the current quarter. The bounceback in these same sectors will boost 2Q growth. Equally important, this week’s March business surveys indicate that growth is picking up in Western Europe. There are two sets of surveys coming out: the national business sentiment surveys and the national PMIs. So far France, Belgium and Germany have released their sentiment surveys; each posted strong gains that lifted them to the highest levels since mid-2008. This positive message was reinforced by the Euro area PMI, which is our preferred indicator, since it tracks activity rather than sentiment. After having stalled the past few months, the PMI surged almost 2pts to 55.5, a level that we think is consistent with our 3% GDP forecast for 2Q (q/q).
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• One important aspect of the rise in the Euro area PMI was the gain in services. We have been concerned that the level of the services PMIs is quite low globally, both outright and in relation to the manufacturing PMIs Confirmation that the services PMIs are now rising, seen in February in the US and UK and this month in Europe, suggests that the base of the economic expansion is broadening from the goods sector—where activity is booming—to the rest of the economy. This development signals the expansion is becoming more self-sustaining and durable.
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• Today’s US economic reports were comparatively lackluster. New home sales fell 2.2%m/m in February to an all-time low dating back to 1963. Weather probably depressed sales but the underlying message is that there has not been much of a recovery in home sales absent the temporary pop induced by last year’s tax credit. The report on February durable goods orders was more positive yet not impressive: there are hints that the growth of core orders, including for capex, is moderating, yet these data are so volatile that we will need at least another month of data to verify this is anything but noise.
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• Japan’s real export volume (BoJ series) rose over 1%m/m in February (25% on a 3m/3m, saar basis), maintaining the impressive recovery (though export volume is still 14% below the old high). Our team is considering making a substantial upward revision to 1Q GDP growth, pending next week’s reports.
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Page 2 of 3: Services PMIs starting to kick into gear

One of the promising developments in the recent business surveys has been the tentative sign that the service-sector PMIs are starting to lift. These indexes were recovering rapidly in 2009 alongside the manufacturing PMIs. However, this process was jolted in late 2009, when most services PMIs retreated even as the manufacturing PMIs continued to advance. The divergence quickly produced a record gap between our global services and manufacturing PMIs.

Last month’s survey round suggested this divergence was starting to disappear. The US, UK and Japan service PMIs all moved up, producing a meaningful gain in the global index. The Euro area did not contribute, however. This changed with today’s reports, which showed that the Euro area flash services PMI registered a strong, 1.9pt increase in March. Assuming the other PMIs build on their February gains, our global services PMI will continue closing the gap with its manufacturing counterpart.

The import of this convergence—with the manufacturing PMI holding its ground while the service sector PMI is gaining—is that the recovery is becoming more broadly-based and self-sustaining. The broader base of demand growth can be seen sectorally, and also via the lens of the labor market, where more widespread production gains are prompting a shift toward job growth, as evidenced by the global PMI employment index and actual jobs data.

Page 3 of 3: Financial conditions limit 1Q downshift in growth

Global growth has downshifted this quarter after a very strong performance in late 2009, partly due to the effects of unusually severe winter weather in the US, Europe and parts of Asia. We are now seeing signs that these temporary effects are waning, pointing to an acceleration in activity in the coming quarter. As discussed above, we also see signs of increasing breadth, both sectorally and regionally.

One very encouraging development is that through this period of growth and political uncertainty, global financial conditions have continued to ease, supporting the economic recovery. Stock prices are on track for a solid gain this quarter, while risk spreads have narrowed. One contributing factor is that global policymakers have signaled their intent to remain highly accommodative. This is particularly true in the developed economies, where core inflation is sliding.

To be sure, we need to remain on guard for an upset in the markets. The ongoing worries about sovereign debt, which may have contributed to the jump in Treasury yields today, could spill over more broadly into financial conditions. Separately, there is the ever-present risk that a surge in oil prices will undermine consumer spending in a period when labor markets are still fragile.

ENDS

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