Analyzing the Week That Was: 14 July 2012

Written by Stephen Swanson

The global economy is deteriorating faster than central banks can ease policy through implementing measures of questionable effectiveness or taking steps whose effect is subject to diminishing returns. Fears of a slowdown in the global economy sent most benchmark stock indices lower as the latest batch of central bank monetary policy maneuvers failed to counteract worries about fading economic activity.


China economic growth cooled to 7.6% in the second quarter from a year earlier, easing from an 8.1% expansion in the first quarter, according to data released Friday by the National Bureau of Statistics. While this represents the sixth consecutive decline in year-over-year quarterly growth, Bank of America-Merrill Lynch analysts noted that the quarter-on-quarter sequential growth rate was 1.8%, representing a pick up from a 1.6% sequential expansion in the first quarter using seasonally-adjusted data. Those who believe China has bottomed may be overlooking unsustainable fiscal policies (investment and surplus capacity) and staggering levels of non-performing loans tied to the real estate sector. Eventually, loans must be written down and losses recognized.


Singapore’s economy unexpectedly contracted 1.1% in the second quarter from the preceding three months due to weakness in the manufacturing sector, following a strong 9.4% expansion in the first quarter. And n South Korea the BOK trimmed both its 2012 GDP growth and headline inflation forecasts for second time this year, citing global slowdown. GDP is likely to be up 3.0%, versus 3.5% seen earlier; inflation at 2.7% versus prior estimates of 3.2%


Brazil’s economy stopped in its tracks in May, according to a GDP proxy released on Thursday by its central bank. The central bank’s proxy showed GDP contracting by 0.02 per cent seasonally adjusted in May from April. Compared to May last year, growth was just 0.4%. The measure – usually a reliable indicator of “official” GDP released later by the national statistics office – comes on the heels of an unexpected fall in May retail sales and offers support for those arguing Brazil’s industrial policies and state-led economic plans are failing.

In response to these and other reports indicating slowing global growth, other central banks joined the US, England, the ECB and China in taking steps to ease monetary policy. Brazil’s central bank, BCB, cut the country’s benchmark interest rate to 8%, with the size of the half-percentage point cut in line with expectations. Monetary policy makers starting slashing the key rate in August from 12.5% as officials work to bolster growth in Latin America’s largest economy. Though rates are at recent lows, Alberto Ramos at Goldman Sachs said: “There is no reference in the statement to suggest the potential near-term ending of the current easing cycle.

South Korea

South Korea’s central bank surprised economists by cutting the base interest rate for the first time since February 2009, in response to global monetary easing and deteriorating growth prospects at home and internationally. Announcing a reduction of 25 basis points to 3 per cent, the Bank of Korea cited concerns about a weak global economy following disappointing indicators from the US, Europe and emerging market economies.

U.S.:  Mixed Data

Data releases this week for the US were light and somewhat mixed with most reports hinting at improving conditions while others, and arguably more significant, suggesting stagnation or further deterioration. Those conveying improvement include a sizeable drop in initial jobless claims from 374K to 350K and consumer credit increasing at an annual rate of 8 percent in May. (Some believe the sudden drop in claims is a one-off event tied to the auto industry.)

Personal Credit Questions

Revolving credit increased at an annual rate of 11-1/4 percent, while non-revolving credit increased at an annual rate of 6-1/2 percent. Non-revolving credit, which includes educational and auto loans but excludes mortgages and other real estate debt, climbed $9.1bn to $1.7tn with 2/3’s of the increase coming from an expansion in student loans. Excluding student loans, which is increasingly being discussed as a bubble in the making, increases in consumer lending supports economic expansion but with consumer sentiment in question and stagnating real incomes it’s fair to ask whether increases in lending reflect growing confidence or borrowing to make ends meet.

Retailers Perked Up …

We also saw that week of July 7th was a good one for retailers according to ICSC-Goldman Sachs whose same-store sales index jumped 2.0 percent for a plus 3.0 percent year-on-year rate that’s the highest in nearly 2 months. But the big improvement seen in ICSC-Goldman’s weekly report was not seen in the Redbook report whose same-store year-on-year pace is unchanged in the June 7 week at a very soft plus 2.2 percent. But Redbook, like ICSC-Goldman, reports rising demand for seasonal goods which is the result of hot weather.

… Mortgage Applications Tailed …

Mortgage applications for the holiday shortened July 6 week fell 2.1% with refinance applications down 3.0 percent, but an improvement from the previous week when refinance applications fell 8%. The index for purchase applications, however, increased 3.0%. Rates continue to move lower with conforming 30-year fixed mortgages ($417,500 or less) averaging 3.79 percent, down 7 basis points in the week for a new record low.

… And Small Business Optimism Fell

Offsetting these generally constructive reports, The National Federation of Independent Business index of small business optimism fell 3 points in June to 91.4 in a serious setback that reverses year-to-date improvement. Labor market measures are especially weak with job creation showing its first contraction of the year.

This is particularly troubling as small businesses are credited with creating close to 67% of all new jobs over the last decades. And since the recovery began in 2009, a yet larger percentage of jobs have been created by business with fewer than 500 employees. Separately, there was bad news released Monday when the BLS released its JOLTS report for May which showed a net employment increase of 12,000 in May versus the more closely watched Employment Situation Report showing private sector job creation of 77,000 (after revision).

While the Fed Fiddled …

On Thursday the Federal Reserve released minutes of the FOMC meeting held June 19 and 20. The statement observes slowing global growth and recent easing actions taken by central banks and notes “the risks to the U.S. financial system emanating from strains in Europe” appeared to increase over the inter-meeting period.

In their discussion of the economic situation and outlook, participants agreed that the information received since the Committee’s previous meeting suggested that the economy had continued to expand moderately, though many noted that a variety of indicators showed smaller gains than had been anticipated. Growth in employment, in particular, appeared to have slowed in recent months, and the unemployment rate remained elevated. Business fixed investment had continued to advance, and household spending appeared to be rising at a somewhat slower pace than earlier in the year. There were further signs of improvement in the housing sector, but the level of activity remained very low.”

The language on further easing (beyond extending operation Twist) is very nuanced but many analysts believe if there is further weakness in labor markets between now and the next meeting scheduled for July 31st and August 1st the Fed will implement another round of QE.

… And Consumer Confidence Dwindled

On the heels of these minutes we learned on Friday the Reuters/University of Michigan measure of consumer sentiment dropped from 73.2 in June to 72.0 in July. Drilling inside of the report we see considerable improvement in current conditions but this was more than offset by a three point drop in the expectations component. Without the benefit of further data, it can only be speculated that worries about political gridlock, European financial strains and labor market weakness are overwhelming benefits accruing from lower gasoline and energy costs.

ESM Constitutionality Questioned in Germany

And speaking of European financial strains, the German Constitutional Court has agreed to hear constitutional challenges to the European Stability Mechanism and asked the President not to sign the ESM or fiscal compact treaties until it has handed down its decision. The delay means that the ESM cannot come into existence in early July, as originally intended, to back up the resources of the euro 440bn temporary European Financial Stability Facility (EFSF) as a “firewall” to prevent contagion in the Eurozone. Italian and Spanish ten year debt remained relatively stable against this backdrop and rumors of exactly what will comprise the bailout of Spanish banks, including stress tests and the creation of a bad bank. The agreement is to be signed July 20 but many believe the conditionalities in the agreement will be more stringent than Spain expects while others believe the amount of euro 100bn will prove inadequate in meeting the full funding needs of the country’s banking system.

U.S. Growth Estimates Lowered Closer to Zero

Finally, Macroeconomic Advisers has estimated the annual rate of growth in the second quarter at just 1.2 percent — well below “stall speed” and the pace needed to reduce the unemployment rate. This also happens to be the growth rate inferred from Goldman Sachs CAI (current activity index) which is operating at a level consistent with economic growth of 1.2% in June, down slightly from May’s level of 1.4%. Both firms, however, believe strength in housing, increasing auto sales and lower gasoline prices will support firmer growth in the second half while others remain less optimistic. The latter see a self reinforcing feedback loop of lower growth until a major economy can act as a catalyst for renewed growth.

And that was the week that was.

Related Articles

Other weekly reviews by Stephen Swanson

U.S. Economy 2012:  Odds Favor a Recession by Stephen Swanson (02 January 2012)

Analysis articles about macroeconomics

About the Author

Stephen Swanson has a degree in economics and an MBA. His corporate experience includes several executive positions including a divisional VP assignment. More recently he has left the corporate world and has been investing in financial instruments and real estate, with interests expanding into S&P futures and commodities. Stephen is known on the internet under the pseudo nom CautiousInvestor and is a frequent commentator at Seeking Alpha where he also posts blogs.

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