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By HaleStewart May 15, 2015 1:09 pm
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International Economic Week in Review: More Concerning Numbers From the US, Edition

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer 

     Before looking in detail at last week’s releases, here is a brief synopsis of the major economies that had releases this week:

  • The UK is growing at a fairly decent rate
  • Although growing, Japan continues to struggle to achieve the elusive “escape velocity” that would definitively signal an end to its deflationary spiral
  • News from the EU points to growth – albeit it a weak rate of expansion
  • The US continues to show signs of weakness
  • China is still slowing

     Let’s start with the UK, as last week saw a slew of British data.  At the start of the week, the BOE kept interest rates at .5% along with maintaining their current level of asset purchases.  Neither decision was controversial.  The BOE also released the inflation report, which contained the following synopsis of recent economic activity:

GDP growth was robust in 2014, moderating in the second half of the year. Despite the weakness in 2015 Q1, the outlook for growth remains solid. Household real incomes have been boosted by the fall in food, energy and imported goods prices. The absorption of remaining slack and a pickup in productivity growth are expected to support wage growth in the period ahead. Along with the low cost of finance, that will help maintain domestic demand growth. Activity in the United States and a number of emerging markets has slowed but momentum in the euro area appears to have strengthened over the quarter as a whole.

The report continued by noting that low inflation was transitory, caused by the sharp drop in oil prices.  Industrial production increased .7% Y/Y while manufacturing was up 1.1% Y/Y.  Both numbers were upside surprises.  Finally, the unemployment rate decreased another .1% to 5.5%.  The cumulative impact of these numbers was to highlight an economy that was in a sweet spot: moderate growth with low to non-existent inflation.

     The main data point from the EU was the GDP report, which contained the following table:

Top line Y/Y growth was positive for the last year, with slight upticks in the latest readings.  Three of the four largest economies are growing Y/Y: Germany increased 1%, France (surprisingly) was up .7%, Italy is at a standstill and Spain’s growth is 2.6%.  Finally, only two countries (Finland and Cyprus) have negative Y/Y readings in the last four quarters.  Overall, the GDP data points to a growing region.

     Chinese news continues to show a slowing economy.  Last week, we learned the respective Y/Y percentage change in fixed asset investment, industrial production and retail sales were 12%, 5.9% and 10%, respectively.  But more importantly, notice the long-term trend of all three data points continues to move lower:

     US news continued to disappoint.  Retail sales were unchanged on the month.  More importantly, this is the fourth disappointing reading since November – which includes the holiday shopping season:

While oil is partially responsible for this drop, recent 1Q personal consumption expenditures were weak across the board, indicating oil's price drop isn't the only cause.  To add insult to injury, industrial production decreased .3% M/M, which is the fifth consecutive decline.  Here is the table from the report:

The topline shows the headline number.  But the contraction is not caused solely by the slowdown in the oil sector (which is represented in the 4 straight materials sector declines).  Consumer goods and business equipment have decreased in 3 of the last 5 months.  Furthermore, capacity utilization has dropped:

While there has been an understandable decrease over the last six months in mining (read: oil) from 87.2% to 84%, manufacturing has also dropped, although a far lower .9%.  And utilities are also down 3.4%.  Some of their decrease is due to warmer weather, but that doesn’t explain the entire drop.  Overall, the US manufacturing plant has been hit by weaker overseas economies and the stronger dollar.

     Finally, Japan released the coincident and leading indicators, with the former decreasing 1.2 to 109.5 and the latter increasing .8 to 105.5.  But monthly gyrations don’t tell the complete story, which is better illustrated over a two year time frame:

After decreasing at the beginning of 2014, the LEIs (dashed line) have moved sideways, which isn’t very encouraging.  And the CEIs (dark line) decreased in the 1H14, increased in the 2H14 only to decrease again in the 1Q15.  Overall neither indicator points to anything aside from anemic current and future activity.

     At the end of last week, we have the following analysis of the major regions:

  • The UK and EU are expanding; the former at the stronger rate.
  • The US continues to print weaker readings.
  • Japan is meandering at best
  • China continues to slow

 

 

 

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