Good news and bad news - Economics weekly


Good news and bad news - Economics weekly

US GDP down but not out. On the face of it, the Q4 release for US GDP was a howler. Output fell by 0.1% (q/q, annualised), which was way below the +1¼% that markets had been expecting.

Economic Analysis

04 February 2013

GDP might have disappointed but job growth is sustained

The US economy created 157k jobs in January, not far below the 180k a month that was managed through 2012. This is encouraging, but the good news didn’t stop there. Revisions to the November and December data showed 127k more jobs were created than originally thought. And let’s not forget that the fiscal-cliff shenanigans will have caused some businesses to delay hiring decisions.

More encouraging news on US housing, but consumers still have the blues 

House prices were 5.5% higher than a year ago, according to the Case-Shiller Index for 20 US cities over the three months to November. That’s now six months in a row that prices have increased y/y. Even so, it hasn’t boosted the feel-good factor, according to a leading survey of consumer confidence. The fiscal cliff weighed on sentiment in December, which fell for the third straight month, and is back to its level at the end of 2011. Most Americans are worse off because of the deal that pushed up payroll taxes.

Good news for global manufacturing

Manufacturers made a good start to 2013 in most countries, according to purchasing managers’ indices (PMI) for January. The US reading reached a nine-month high, adding to evidence that the surprising fall in Q4 GDP was an anomaly. Across in Asia, figures for China suggest a modest recovery remains on track. Japan's PMI rose to a four-month high but remained in contraction territory.

Japan will be hoping that the recent change in monetary policy, which has helped drive down their currency, will boost output in the months ahead. But those changes could have consequences for the global economy far beyond a weaker yen – as we discuss in a recent paper.

UK manufacturing held back by falling export orders

Will sterling come to the rescue? The UK manufacturing PMI dropped from a 15-month high of 51.2 in December to 50.8 in January. Domestic demand increased but new export orders continued to decline. Manufacturers remain focused on cost reduction as market conditions remain tough, but a small increase in employment suggests there are pockets of optimism.

That could be due to the recent fall in sterling, which has slipped to a 14-month low against the euro. One pound will get you 1.16 euros at time of writing, which represents a 9% depreciation from last summer. The Eurozone crisis has cooled over recent months, helping to attract investors back towards the single currency, while Sterling has been hit by a run of poor data.

Mortgage approvals reach an 11-month high

There were 55.8k approvals in December – 6.1% higher than a year ago, but still only a little more than half the levels we saw at peak in 2006. Growth in actual lending was more muted, however, at just 0.6%y/y. This is consistent with trends in the housing market. Prices are flat in y/y terms, though a small rise in January will have brought some New Year cheer to homeowners (+0.5%m/m according to Nationwide).

Corporate sector borrowing continues to decline

Last week, I reported that 2012 had been a record year for corporate bond issuance. However, bank borrowing continues to fall – balances in December were 6.2% lower than a year ago, and 28% lower than their 2008 peak. It’s tempting to think that the two trends are connected i.e. companies are issuing bonds and using the proceeds to pay down bank debt.

That may have been true between 2009 and 2011, according to the Bank of England, but 2012 was a different story. There was an increase in the proportion of companies issuing bonds for other reasons (e.g. future business expansion) rather than repaying bank loans.

But on closer inspection, the release wasn’t that bad. Most of the fall was down to a sharp decline in defence spending by the government – likely a one-off – and companies running down stocks. These offset higher household consumption, rising house building and stronger business investment. As the Fed said in its post-meeting statement, this reverse doesn’t herald another recession. But it’s a reminder of the fragility of most advanced economies.

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