Starting With Japan
Japan's production fell over 15% in 3/11 in the wake of the monster quake / tsunami combo. This
dramatic plunge created substantial supply chain disruptions which negatively affected output in
other major economies to varying degrees. Over the past two months, Japan's industrial output has
increased by nearly 7.5%, and it is widely expected that Japan boosted output by another 5.5% in
June. So, the parts and goods pipelines are being refilled, which will benefit global output over
the final six months of 2011.
US Leading Economic Indicators
The weekly and monthly leading indicators remain in positive territory, but momentum has eased
substantially reflecting a sharp contraction in the breadth measure of new orders for business, more
sluggish sensitive materials prices and a higher level of initial unemployment insurance claims than
seen earlier in the year. Breadth of new business orders in Feb.'11 rose to the highest level seen
since late 2003, and was in rare company with readings observed only during the early rebound
years of an expansion. The slowdown since Feb. is nothing out of the ordinary.
Coincident Economic Indicators
As a result of huge gains in the SP 500 index as well as in sensitive materials prices, the leading
indicators have overstated the case for actual recovery. What's more, although output and sales
data beyond the troubled construction industry have been very solid, employment and wage data
have been very muted. Since consumers have been trying to save more and borrow less and have
also had to contend with rising fuel prices, the coincident indicator data sets have been sluggish.
The weekly coincident activity index I use is nearly 7% above the 2009 cycle low, but remains a
full 8.0% below the prior cycle expansion peak. Not for nothing that so many Americans see the
US as still mired in recession.
Long Term Leading Indicators
There remains ample slack in the US economy both in terms of physical and financial capital.
We should be sitting back and looking confidently at a long period of economic expansion ahead,
including an eventual recovery in the construction markets. Instead, there are significant negatives
and uncertainties to contend with. Despite recent weakness, oil and petrol prices remain in
powerful uptrends which create inflationary pressure that undercuts the real wage and profit
margins of businesses that are net consumers of fuel. This is coming at a time when senior
managements are using a weak labor market to screw down wages and pay themselves ever so
handsomely. Real incomes of most workers are being punished and growing income disparity
is slowly working to destabilize the economy. As well, monetary liquidity growth is set to
decelerate markedly from admittedly high levels at a time when the credit markets are thawing
out ever so slowly. Finally, there is now talk in Wash. DC that a grand, longer term budget deficit
reduction program is being cobbled together around the issue of raising the debt limit. Should such occur, it could put significant fiscal drag on an economic recovery that has yet to prove clearly
that it can sustain itself without continuing heavy monetary and fiscal accomodation.
Right now, my indicators say no easy riding here, but a wearying grind instead.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!