Daily Economic Briefing: April 7, 2010

Daily Economic Briefing: April 7, 2010

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• Our global services PMI bounced strongly in March, signaling an important broadening in the economic recovery. Until now, the recovery has been dominated by the manufacturing sector, reflecting increased demand for goods such as autos and capex and the stabilization of business inventories. The implied acceleration in activity outside the manufacturing sector suggests new engines of demand are firing, which will make the recovery stronger and more durable.
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• With both the services and manufacturing indexes of our global PMI moving up in March, the all-industry output index—which is a proxy for global GDP growth—increased to 56.6. This is the highest level since July 2007, before the onset of the financial crisis. This level of the PMI historically has been associated with global GDP growth of about 3.5%, which is a touch below our forecast (3.8%q/q, saar). One notable feature of the March surveys was the evidence of a normalization in the employment and inventory indexes, both of which topped 50. This adds to evidence that companies have begun to add resources in response to the extended run of strong demand and production growth. This shift in business behavior is crucial to establishing a self-sustaining expansion that can be weaned from fiscal policy support.
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• In remarks today, Chairman Bernanke said inflation is under control but did not reinforce the message conveyed in yesterday’s minutes that it is surprising on the downside. Our long-standing expectation that core inflation will fall well below the FOMC’s forecast is what lies behind our forecast for stable policy rates into 2011. New York Fed President Dudley said the Fed must be willing to respond to evidence of asset bubbles under certain circumstances, but he favors using regulatory or supervisory tools instead of policy rates. Dissenting once again was Kansas City Fed President Hoenig, who said in a speech today that the Fed should raise policy rates to about 1% to forestall an asset bubble. Hoenig is an outlier at the Fed but his views probably get a more sympathetic ear abroad, notably in Europe. In central bank communications elsewhere, the BoJ’s Shirakawa sounded more optimistic about Japan’s recovery, but with the economy mired in deflation, the risks remain that the Bank will enact new unconventional easing. Tomorrow we hear from the ECB and the Bank of England.
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• Whereas UK GDP was revised up in 4Q09 to show a more impressive start to the recovery, the opposite has occurred in the Euro area. Today’s Eurostat revisions show that GDP stagnated in 4Q vs the previous estimate of a 0.5% gain. We do not think the economy grew very much in 1Q either The good news is that activity appears to have accelerated significantly into the current quarter, at least based on the monthly business surveys.
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Global PMI makes great leap forward in March
J.P. Morgan’s all-industry PMI output index—which is a proxy for global GDP growth—rose strongly to 56.6 in March from 53.8 in February. This is the highest level of the PMI output index since July 2007, when the global economy was still growing at a robust pace.

There are three main points to make about this month’s PMI surveys. First is the breadth of the advance. Second is the large bounce in the underperforming service sector. Third is the elevated level of the output and orders components.

The breadth of the advance in the March PMI survey was impressive. Both the global manufacturing and services PMIs gained ground. Likewise, most national PMIs participated in the advance, evidence of the powerful global dynamics at work. Finally, the lagging components of the global PMI, particularly the employment and inventory indexes, have climbed to more normal levels as businesses become more expansionary. Indeed, the all-industry PMI employment index rose above 50 in March for the first time in almost two years. This level has been associated with significant job growth in the past (i.e., the PMI employment index has a negative bias). Employment already is growing in many countries, including the US, boosting labor income. With asset prices also rising, the fundamental (as distinct from policy) backdrop is becoming more supportive for consumer spending.

The large bounce in the service-sector PMI was particularly encouraging. Up until now, the recovery in the global economy has been highly focused in the goods sector, including spending on autos and capex, as well as inventory. This fueled a record surge in global manufacturing output, which accounted for the lion’s share of the advance in global GDP. The belated move up in our services PMI shows that the recovery is now broadening to the non-manufacturing economy; this means the expansion is resting on a firmer foundation, lowering the chances of an unexpected stall. There is more room for this process to run. The service sector activity index now stands at 56.0, compared with an output reading of 58.8 in manufacturing. Traditionally, the services PMI tends to exceed its manufacturing counterpart.

The PMI all-industry output index is pointing to rapid global GDP growth of about 3.5% annualized. This is at least a percentage point above our current estimate of potential growth, so the current pace, if it can be sustained, is likely to compel substantially faster job growth over time and an associated decline in unemployment The national PMIs suggest that growth should be above trend in most of the major economies including the US, the Euro area, the UK, Japan, China and India.

ENDS

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