Thursday, August 20, 2009

More Signs of An Economic Bottom Emerge

Over the last week and a half more data has emerged that the economies of the US and our trading partners are stabilizing. Let's take a look at the data.

From the WSJ:

Norway's second-quarter mainland gross domestic product, which strips out oil and shipping activity, grew 0.3% on the quarter-earlier period, Statistics Norway said Thursday. The latest data mark an end to a two-quarter streak of declining GDP, with output down a revised 1.3% in the first quarter, and is much stronger than consensus from economists who expected a slight contraction in the second quarter.

And this is part of a larger picture in the OECD:

Gross domestic product (GDP) in the OECD area stabilised in the second quarter of 2009 (minus 0.002%), according to preliminary estimates, following a fall of 2.1% in the previous quarter.

For the Major Seven* countries, GDP fell marginally by 0.1% but with considerable variation in national rates, ranging from a 0.9% increase in Japan, following two quarters of significant falls (minus 3.1% and minus 3.5%), to a 0.8% decline in the United Kingdom. Positive growth was also recorded in France and Germany, both up 0.3% compared with falls of 1.3% and 3.5% respectively in the previous quarter. GDP fell by 0.3% in the United States following a 1.6% fall in the previous quarter. etc.

Here is a chart of the growth rates:

Japan grew surprisingly well with Germany and France also printing increases. However, Italy fell as did the UK, indicating there is further work to do.

And other countries are emerging from contraction:

Hong Kong's gross domestic product in the April-June period grew 3.3% on a seasonally adjusted basis from the January-March period, when it contracted 4.3%.

The quarter-to-quarter expansion was the first since last year's second quarter.

On a year-to-year basis, the territory's second-quarter GDP contracted 3.8%, narrower than the previous quarter's 7.8% fall and better than the survey's median forecast of a 5% decline.

And then there is Israel:

Israel's gross domestic product grew in the second quarter following six months of contraction, the latest sign the global economy may be emerging from its severe downturn.

The Central Bureau of Statistics Sunday said GDP grew at an annualized rate of 1% in the three months from April to June, having contracted by 3.2% in the first quarter 2009, and by 1.4% in the fourth quarter 2008.

"The aggregate data from the most recent quarters attest that the situation of the Israeli economy is better than those of the world's leading economies," Prime Minister Netanyahu said in a statement.

The return to growth was aided by a surge in government spending, but a recovery in exports and consumer spending also drove the pickup. However, some of the recovery in exports may relate to the start of full production at Intel Corp.'s (INTC) new factory, and may therefore not be sustained in coming quarters.

The important point to note with the above information is this: we're not talking about one country; we're seeing data emerge from a variety of countries on a variety of continents that growth is returning. It's important to note this is one quarter of data. However -- it's more than one country which is an extremely hopeful sign.

And the US is also showing further signs of good news.

For the first time in considerably more than a year, the Empire State Manufacturing Survey indicates that conditions for New York manufacturers have improved. The general business conditions index increased 13 points, to 12.1, its highest level since November of 2007. Although the inventories index remained well below zero, the new orders and shipments indexes rose to their highest levels in many months. The prices paid index was positive, while the prices received index continued to be negative. Employment indexes were much improved from their recent low levels, although they remained below zero. Future indexes generally rose from last month and conveyed optimism about the six-month outlook; the capital expenditures index rose to its highest level in over a year.

This number bottomed at the beginning of this year, but has been in a clear uptrend since then. Now it has turned positive which is a very hopeful sign. And adding to the good news was last Friday's industrial production number:

Industrial production increased 0.5 percent in July. Aside from a hurricane-related rebound in October 2008, the gain in July marked the first monthly increase since December 2007. Manufacturing output advanced 1.0 percent in July; most of the increase was due to a jump in motor vehicle assemblies from an annual rate of 4.1 million units in June to 5.9 million units in July. Excluding motor vehicles and parts, manufacturing production edged up 0.2 percent. The output of utilities fell 2.4 percent, reflecting unseasonably mild temperatures in July, and the output of mines increased 0.8 percent. At 96.0 percent of its 2002 average, total industrial production was 13.1 percent below its level of a year earlier. In July, the capacity utilization rate for total industry edged up to 68.5 percent, a level 12.4 percentage points below its 1972-2008 average.

This is the first increase in quite some time. As a result, be cautioned that the general trend is still lower. However the rate of decline in this number has been decreasing over the last 6 months and various industry indicators (like the ISM and various regional Federal Reserve surveys) have been showing increases, so there is a good reason to be hopeful we're seeing a bottoming out in this area as well.

And there are further signs the housing market may actually be hitting a bottom as well:

New-home construction and permits fell last month, but single-family-home starts remained strong, another sign of stabilization in the housing market.

Multifamily housing starts, a more volatile measure that includes properties such as condominiums and small apartment buildings, pulled overall housing starts down 1% in July from a month earlier to a seasonally adjusted 581,000 annual rate, the Commerce Department said Tuesday. That compares with a 6.5% increase in June.

Construction of single-family homes, though, rose 1.7%, to 490,000, in July after climbing 17.8% in June. Single-family permits, a sign of future construction, rose 5.8%. The rise in construction marked the fifth consecutive monthly gain, showing once again that the housing market is firming up, albeit at a slow pace.

Let's place all of this data in context. The US economy has gone through its worst recession since the Great Depression. That means we're not going to simply wake up and see strong growth and low unemployment. Instead, it's far more likely to see the types of data we have been seeing for the last few months -- a gradual change from free fall to a moderate drop followed by a bottom. The data over the last few months give strong reasons to think the worst is over.