Tuesday, October 25, 2011

Things Are Not As Bad As They Seem

I’m fairly certain that things picked up in Malaysia during the third quarter of this year – we’ll know better in about three weeks time, when the GDP data comes out.

In the meantime, despite Congressional paralysis and the simmering crisis in Europe, it looks like the US won’t be at risk of recession anytime soon (excerpt):

GDP Probably Picked Up in Third Quarter: U.S. Economy Preview

Oct. 23 (Bloomberg) -- The U.S. economy probably grew in the third quarter at the fastest pace this year, easing anxiety that the recovery was on the verge of stalling, economists said before a report this week.

Gross domestic product, the value of all goods and services produced, rose at a 2.5 percent annual rate after advancing 1.3 percent in the previous three months, according to the median forecast of 68 economists surveyed by Bloomberg News before the Commerce Department’s Oct. 27 release. Orders for business equipment rose in September and new-home sales stabilized, other data may show.

Consumer spending last quarter may have climbed more than twice as fast as in the prior three months, helping the economy withstand the plunge in stocks caused by Europe’s debt crisis. Nonetheless, the pace of growth has failed to cut unemployment, prompting Federal Reserve officials like Janet Yellen and Daniel Tarullo to say that more monetary stimulus may be needed...

Lest you think I’m blowing smoke, the data points have been building up over the last couple of weeks or so:

  1. Fed Reports Modest Growth as Firms Voice Doubt on Recovery
  2. U.S. Economy: Home Starts Jump, Consumer Prices Stabilize
  3. MA's Monthly GDP Index Rose 0.4% in August

That last one is a favourite of mine as Macroeconomic Advisors calculate a monthly measure of US GDP, which is useful in tracking the path of output. It also comes out a heck of a lot faster than the quarterly data.

And if you’re wondering why there seems to be a divergence between what the people think the economy is doing, and what it’s actually doing, it’s somewhat related to my post yesterday, but this article from Reuters does a better job than I can (excerpt):

Analysis: A divergence of sentiment and reality?

The grim facts of the now four-year-old credit crisis and western economic funk are undeniable, even if still some distance from the ravages of the 1930s.

And there are some who argue the unhappy confluence of crippling household and government debt, policy exhaustion, aging populations and resource scarcity spells a long depression-like period of near-zero Western economic growth ahead.

But there is also a danger that all the negativity itself will push the global economy over the edge.

As Klaus Kleinfeld, CEO of the largest U.S. aluminum producer Alcoa Inc, said last week: "It almost looks like the world is worrying itself into another recession."

...This is basically the dark side of what British economist John Maynard Keynes described in 1936 as the economy's "animal spirits" -- or "a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities."

The same human emotions trigger often irrational retrenchment and hunkering down when confidence about the future is doused by a cacophony of disaster warnings...

...But are there signs of a sentiment overshoot? Or, as Morgan Stanley economist Joachim Fels asks, has "gloom fatigue" set in?

...Of course, there may be good explanations for this divergence. Business and consumer surveys are watched closely because of their track record as leading indicators of real sector activity. Real data typically follows anecdotal survey evidence much more quickly than has been the case in recent months, as the graphics above demonstrate...

...Some may also suggest that while unemployment remains high, it's possible rising income disparity means the richest continue to buy in sufficient amounts to outweigh retrenchment at the bottom -- in turn, keeping aggregate production going apace.

Whatever the best explanation, the gap between survey evidence and real activity bears close watching for the months ahead. One of them will have to give. If surveyed gloom is correct, growth will weaken sharply into year-end and another recession on both sides of the Atlantic looms large...

...On the other hand, it's possible that fear itself may have been excessive and the truth more prosaic. If so, the political focus needs to be on boosting sentiment with credible policies soon.

My guess is that Malaysian growth will surprise on the upside for the second half of the year relative to the consensus (side effect: BNM will keep the OPR on hold again). The government’s “optimistic” forecast for 2011 may in actuality be spot on – I expect GDP growth for the year to hit the bottom of the government’s forecast of 5.0%-5.5% at the very least, and perhaps a little higher if the 4Q numbers turn out better. And that puts the even rosier 2012 official forecast in play.

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