Decoupling of growth US and Europe not at all clear

The correlation between the growth of France with that of the US is high (about 0.8). The decoupling of the growth of France from the US is not at all clear. The growth differences have been higher. The past shows that those growth differences didn’t last long. By the way, economic growth in the US is structurally higher than in France because of the (1%). That growth difference was lower than 1% since 2000 but seems to be rising a bit (say 0.5%) again.

Most other countries in Europe have a clearly lower correlation with the US, but still quite high. Together the growth of total Europes correlates only a bit stronger than the growth of France with the US. The correlation between growth between European countries is often clearly lower than the correlation with US growth: it should have been better to take the dollar as common currency (when correlation is important as often has been stated).

The chart of Rosenberg shows that the growth in Europe correlated strongly with the US and the deviation is not that big now. His question is: Is there a decoupling of growth between the US and Europe?

N.B. Rosenberg thinks the growth of the US will fall to European levels, while I think the old growth differences with the US will come back pretty soon with recovering growth in Europe (from recession levels now).

NAHB points to more housing starts and will help US growth in 2013

The NAHB index for the confidence of homebuilders rose again in the US. This is a leading indicator for housing starts .The abysmal fall of housing starts was a very important reason why the economic recovery since 2009 was so poor. Now it signals help for the economy in 2013. This is necessary to limit the damage of the fiscal cliff (the end of the Bush tax cuts that will cause 4% austerity unless enough repair works will be in place;


my opinion: the fiscal cliff will be diluted to 2% and the multiplier effect will be c. 0.5, so it will diminish growth with 1% next year; this is not enough to cause a recession, especially not with the help of more housing starts).

The news about the US housing market remains quite good after several disaster years. More and more statistics show rising house prices, inventories versus sales are declining and foreclosures will decline.

This is not yet a good or normal housing market. There are still huge numbers of foreclosures, too many millions of Americans that are under water with their mortgages. It is still not easy to get a mortgage, but the situation is improving. With government subsidies (also favourable for banks) this can improve further.

Initial claims point to lower growth in the US

The initial claims for unemployment in the US are rising. The beautiful decline is over that pointed to more employment growth and better income growth. After the sudden deterioration a further rise is not that likely. The current rise probably is mainly caused by a payback of the very warm winter weather and this should stop in May.

There are almost no indicators and especially not weekly indicators that move so well up and down with the US economic growth in a quarter (see chart of the comparison).

This rise of the initial claims is a favourite argument for the people who see the US economy sliding to very weak, QE3 prone, growth. They see it as an important clue for a further decline of the Citigroup Economic Surprise Index. However when the rise of initial claims in mainly caused by the weather one should not stay awake because of that.

Recovery US since 2009 this time different

The two charts of benderly (Applied Global Macro Research nowadays) show that goods have recovered as should have happened after a deep recession (manufacturing base in the US is coming back), while the service sector is doing way worse than ever after a recovery. Normally services are growing fast and take an ever bigger part of GDP.
This time was different. Productivity growth is hurting civil servants and maybe some other jobs in the service sector. That is quite unusual (productivity growth is only measured for the private sector, the productivity growth of the government is by definition 0; this definition should be changed).

Employment growth by sector before and from 2009 in the US

The chart shows employment growth before and from 2009 and how big the sector is. Construction and somewhat surprising civil servants are the big losers since 2009. Also the financial sector (all those mortgage sellers to muppets etc.) did do badly.

Cars, professionals and temps did very well since 2009. The rebirth of US manufacturing seems to have started.
Healthcare was and is the big engine for employment growth (a touch less since 2009)

source: Atlanta FED
http://macroblog.typepad.com/.a/6a00d8341c834f53ef016764261d7e970b-800wi

The rule of 4% spells disaster

Strategas had as most important reason why economic growth in the US will disappoint the rule of 4%. Every time when the nominal GDP growth of the Us fell below 4% the economy came into a recession. Now that seems to have happened again. Maybe that is why ECRI so stubbornly holds to its view that the US will soon be in a recession.
This time is different?
No, the economic growth in the US of 2011 probably will be revised higher (GNI higher) in the coming years.

Bianco: QE3 will arrive, employment growth to deteriorate

On his monthly conference call Jim Bianco showed his bearish feelings again. That has become quite common in the last years, but he warns that you will get a new wave of monetary easing (QE) when the pessism gets rampant and that has been excellent fuel for equity markets and commodity prices.

The FED hast been erratic in the last weeks about QE3. The majority of Fed governors is more and more against even more QE because of its dark influences on (implicit) inflation expectations. But the troika that determines everything (Bernanke, Yellen and Dudley; dthe others are muppets) is addicted to QE and will seize every opportunity to enact a new round of QE. That will not happen as long as Operation Twist is still going on (=until the end of June), so long they can control their selves, but from their meeting on June 25 on it will become exciting.

QE3 don’t has to arrive when they maintain their norms and values for inflation: PCE (personal consumption expenditures, weighted as in the GDP) has to get below 2% (according to their expectations). To keep the interest rates at 0% the inflation must remian below 2%, otherwise they have to write a note like the Bank of England that the inflation is too high at the moment, but, mark my words, the inflation will go down soon, be patient.

The realised PCE inflation in the VS is already for quite some time above 2%, especially because of higher commodity prices. The coming months you can safely bet according to Bianco that the PCE inflation will not decline below 2% thanks to the higher gasoline prices and the higher core inflation. That is no problem for the FED, because of their trick with the inflation expectations of all Fed governers. They revealed all (including the hawks) that the inflation at the end of 2014 will be below 2%. As long as those forecasts will remain low enough the FED has a perfect excuse to perform a QE3 in emergency cases (=when equity markets fall too much).
The track record of the FED inforecasting inflation has been very poor according to many studies, but the rules are for the time being as the troika have instated. .

For the time being, because the bond vigilantes can spoil the party. When they see too many rounds of QE coming they can send implicit inflation expectations to all time highs and then the FED has to listen (otherwise: Bernanke= Von Havenstein, the bank president of the Weimar republic).

QE3 will arrive according to Bianco, because Bernanke is right and the US economy will prove too weak to get a good sustainable recovery. Bernanke had three reasons for that:
1. The employment growth has accelerated, but only unproductive people got work.
2. It is very well possible that the potential growth of the US is overstated; it will not be 2.5% but 1.75-2%. That is a disaster scenario, then all risk on investments are 20-30% overpriced.
3. Because of record hot winter weather (3 degrees C more than normal) 72.000 more people got work in December/February each month (Global Macro Advisors calculations) than normal. That will be a drain on the employment growth in the coming month (March was the first one).

To summarise, economic growth will fall back. Profit growth in the US will be very bad in Q1 and Q2 according to Bianco. The guidance is since January horrible (see chart) and profits are now growing less than inflation. Profits will no longer support equity markets, especially when the GDP growth falls back.
But thanks God, then QE3 will arrive and the S&P500 can get with some luck an all time high over some time.

Employment growth US in line with SP500

Again surprised the employment growth in the US to the upside, 227,000. Better than the consensus of 204K but less than the visions of Elfenbein of Crossing Wall Street. The government only shed 6,000 jobs and seems to have fired enough civil servants. The unemployment rate didn’t decline even while in a normal month 140K employment growth is enough to stabilise unemployment rates. Now there are suddenly a lot more people that are searching for a job and have enough confidence to say they are searching for work. The disappointing employment growth for women was bend completely in February. The employment growth was revised higher in the previous months. So everybody was happy (except Plosser maybe)..

The employment growth is at the moment pretty normal for an economy that is already for some time out of a recession. The chart above shows that employment growth correlated pretty well with the strength of the S&P500 in a (four year) cycle. Sometimes it was even a leading indicator. In 1987 and 2000 the S&P was much higher than the employment growth suggested, that should have been a warning. Equity markets do well when the employment growth accelerates, so it is not that strange that so many people try to forecast what the employment growth will do.

Ever lower income growth for lower middle class, others see more income growth

Since about a year the wage growth in the US is calculated for all labourers together, for the ordinary employees (lower middleclass) and their bosses, supervisors etc. (upper middleclass)
The average of those two groups shows a stable rise of wages. The old wage numbers took only the lower middle class wages into account and by doing so it was hard to explain why consumption growth was doing so well.

The chart of Benderly shows that the wage of the lower middle class is rising less and less. That trend is inexorably down, even while the recession has ended three years ago.

For the upper middleclass the bad times are over. They get salary rises (in the US). Around the credit crisis those wages were going down, but now it is Goldilocks for them. This means bigger income inequality is continuing.

Credit growth US has almost left the credit crunch phase

At long last credit growth is accelerating in the US to an almost decent level. Infinite liquidity of FED didn’t get traction until now: the FED was seen pushing at a string to seduce banks to give credit. But the chart of Bianco shows that credit growth is now at a post credit crisis high. It is still too low for normal times (and so we are still in the grey area of the credit crunch).
Striking is further that the recovery on the equity markets so strongly correlated with stronger and weaker credit growth.

The growth of M2 has become quite high and when the velocity of Money remains somewhat constant that should be a sign for faster nominal GDP growth. The volatility as measured by the VIX is low and that is creating a good climate for investments: investments in software & equipment, structures and even residential investment will be leading economic growth up.

Initial claims in US in line with 4% growth in Q1

The initial claims for unemployment are declining prosperously in the US in the past weeks. When that should be your only guide for growth, you should believe that growth in Q1 will be something like 4%.
The initial claims De initial claims are still quite a lot higher than in 2004-2006, so it can go lower. But the initial claims are starting to point at a growth of the employment of more than 200,000 and that is surprisingly high (=nearly impossible) given the economic growth in the past year.
The decline of the initial claims is an important leading indicator (however only leading for 1-2 months) and maybe the most important indicator for the belief that macro fundamentals are improving in the US.

Macro surprises positive in the US and Northern Europe, negative in Pacific and Southern Europe

The chart of ASR (Absolute Strategy Research) shows we are probably a bit too pessimistic about the growth in the Eurozone outside the war zone of the PIGS. The IFO in Germany told a completely different story than we hear every day, namely that it is crisis and that will be the case the rest of the year (at least). Also Scandinavia surprises positively (again) and in the UK the current affairs are not more depressing than initially thought. It is to hope that will also apply for France and the Netherlands. In the Netherlands the real estate market is too bad to let consumer confidence improve meaningfully while income growth is dreadful. It is too difficult to compensate this with better exports. In Germany things are rosier: the housing market is clearly recovering, the confidence is still high, the unions will get a nice rise of the wages and the lower euro will help exports. This is not yet visible in better growth of the industrial production and retail sales but you can hope on improvement coming. So it is not that strange that the DAX is doing so well in the last weeks.

In the US it looked like the surprise indices had topped, but unexpectedly they came back at the old tops. The surprises refuse to vanish, we seem to need more patience (a few months?) before economists have drowned their black poison with excessive QE abuse.

In the Pacific the surprises disappoint. That is amazing, because we hear every day that things are going so well and that growth will not be that vulnerable for low growth in the West because they are selling more and more toe ach other in Asia. The growth in china seems to disappoint a bit more than previously thought. We have had the warnings: declining house prices, overspeculation in Wenzhou but especially clearly lower demand from steel and electricity than thought. The growth of China can drop to 7.5%, also because infrastructure spending is slowing and investments in real estate ought to soften also.

ISM topping at 56 over two months

Every year at this time the parts of the ISM index are revised and that changes the levels of the ISM, this to the annoyance of the quants that cannot back-test models with ISM because of all these changes. This year the orders component got a blow.

Almost all components of the ISM rose past month, but orders rose less than inventories (not good for the leading indicator for ISM of orders/inventories).
After the revisions the ISM landed almost exactly on the model values this month. According to this model some further rise of the ISM in the next two months to 56 could be very well possible and then a limited decline could occur.

At the site of the ISM they had some optimistic remarks from several sectors:
• Still seeing raw materials pricing moving down in general, but expect inflation later in the quarter." (Chemical Products)
• "Year starting a little slow, but customers are positive about increased business in 2012." (Machinery)
• "Once again, business continues to be strong." (Paper Products)
• "Pricing remains in check with the demand we are seeing. Supplier deliveries are on time or early." (Food, Beverage & Tobacco Products)
• "The economy seems to be slowly improving." (Fabricated Metal Products)
• "Business lost to offshore is coming back." (Computer & Electronic Products)
• "Business remains strong. Order intake is great — more than 20 percent above budget." (Primary Metals)
• "Indications are that 2012 business environment will improve over 2011." (Transportation Equipment)
• "Market conditions appear to be improving, with the outlook for 2012 better yet." (Wood Products)

Shiller: real house prices back to 2002, not yet bottom in US (?)

The monthly numbers of the Case Shiller index for the house prices in the biggest 10 and 20 cities in the US declined -0.7% in November and yoy -3.7%, a tad more than in October.
That is disappointing and the pessimists think the bottom will not be reached in 2012. In nominal terms the house prices are bottoming since 2009 and we are already almost three years at the bottom. This can easily last for another two years but I think we will see a (modest) rise of house prices already this year. Vacancies are down, inventories are declining at a 17% pace yoy, affordability is splendid and household formation is growing with employment gains and there will arrive help from Obama.

(chart from Calculated Risk)

New US leading indicators: 2% economic growth and slowing of growth industrial production

From time to time it is time to trash the old leading indicators and adjust them to what the spirit of the age thinks is better. There were serious complaints about money growth as leading indicators and credit indicators were sorrowfully missed. So they have shaken old with new leading variables and a new set has seen the light.
That new set shows the leading indicators are suddenly at a much lower level than before (see chart of Strategas).
The new set leading indicators explained economic growth two quarters ahead was still not that good. I made two charts for the relation between the new leading indicators and economic growth respectively growth of the industrial production. Since 1995 32% of the fluctuations of the economic growth could be explained and 52% of the changes of the growth of the industrial production.
There are periods in which the leading indicator structurally indiacato too much or too little economic growth.
At the moment the new leading indicators seem to point to economic growth of 2% in the US (but growth was recently lower than the leading indicators indicated) and also a fall back in the growth of the industrial production seems in the offing.

Off To The Mall: ISM hopes On Santa

The retail sales are the most important indicator for growth in the US. It leads a bit ISM orders. At the end of 2008 and at the beginning of 2009 the retail sales fell too far below trend and a recovery had to start. Then the retail sales moved too far above trend in 2010 and a correction started that was finished in the third quarter. That correction was overhyped and the New Normals told a double dip was unavoidable. The trend of the retail sales is marginally rising. For a stronger trend car sales must go up further (is improving already), the housing market should recover more convincing (H2 2011?) and employment growth must be clearly stronger (also H2 2011).
To get a strong/ stronger ISM the Christmas sales must be better than last year. Friday is Black Friday and there is the big test for retail sales. Prices are slashed eve n more than in previous years.

The front page of Barrons (see picture) had: Off To The Mall. Jacqueline Doherty wrote an optimistic story about the growth of consumption in the US. The consumer credit is back again at normal levels versus income and consumption is no longer lower because of that. She cites Paulsen of Wells Fargo (he could be a very good member of my club of optimists). The consensus sees a rise of 2.3% for the Christmas sales, but Paulsen thinks it will be 3.5-4%. And in 2011 the American economy will grow about 4%, as also Clifton from Strategas says (and he saw 2009 and 2010 excellently). Clifton says the Bush tax cuts will be extended for at least a year and because of that consumption growth will not be hit as hard as the consensus thinks.
Doherty also takes into account what the New Normals are saying: deleveraging will continue for several years, this is an unstoppable process especially because net assets are still 23% below the 2006 levels.
The New Normals had good reasons why the American consumer should change from a grasshopper to an ant, but that doesn’t seem the case. People that sent the key of their house start consuming again and buying on credit if possible.
Dohety’s article gives losts of arguments why the Christmas sales and consumption growth will be good. Saving will not go up now employment is growing again, consumer debt is back to normal levels, interest rates are so low, the amount of defaulting consumers is going down rapidly. Credit card companies send 3 times as much mails as previous year to get a credit card. Starbucks saw 5% more traffic and 8% higher spending.
That all makes it plausible that the lines for Macy’s etc will grow, but that’s unfortunately also true for food stamps. In total that is leading to more consumption, but the distribution could be a lot more just.

Core CPI too low for fed

The analysis of Tilton (GS) puts question marks behind my expectation for a marginal rise of US core CPI based on higher rents. The three main trends (see chart) force this: rents are going up almost nothing, goods deflation will be back and srvice inflation will go down.
Rents will rise only a little bit (less than I thought), the service inflation will decline (I agreed already, but ISM Prices non manufacturing suggests something else) and goods deflation will be back in town, but not hugely (you will get more deflationary good prices than I thought). Cars, tobacco and apparel caused the big rise of the core goods inflation past year. For cars and tobacco (+30%) these tremendous price inflation will not return.

So the conclusion is clear: core CPI will be too low for the Fed.

Benderly thinks the trend of the core CPI is now 1%, higher than the current core CPI because the cyclical part (LUPAT) has gone down too much. I agree, but the trend of LUPAT is down, even while in the short run it will go up (see chart Benderly).

QE2 and the path of Arthus

The chart shows the economic growth of the US according to several models/ theories.

In the long run the US economy followed the path of the law of Okun: the growth was about equal to 3% plus two times the decline of the unemployment rate, so structurally 3%.
Since the credit crisis is the US economy more and more deviating from the 3% path of Okun.
The economy is growing according to the best path of Arthus, the guru of Natixis. He is more or less a supporther of the New Normal theory. The loss of growth according to the Okun path is permanent he says and you will see no convergence to the Okun path in the coming few years. That is because of deleveraging the consumption cannot faster than income (something that in the past happened after every recession and that caused higher growth than 3%.
Even with the best path of Arthus the Fed cann't live, that forbids their mandate (and triggers impeachmeant of bernanke over some time). If the US economy continues to follow the path of Arthus the unemployment rate will not decline (but stabilise)enough reason for Obama to fire Bernanke, but than he has to be quick because he cannot be reelected on the path of Arthus.

So the Fed had to do something else thean normal, somthing that makes it possible to get the moderate V Bernanke path. That is why the Fed has to print tons of money even while there is not much danger for a recession in the coming quarters. Those hundreds of billions must restore confidence by blowing up the stock market, easing financial conditions so business get more credit and mortgages are easier to get also.
Obama will start to mr. nice guy for the republicans (as also Clinton did) and extend the Bsh tax cuts for at least one, probably two years, making the moderateV Bernanke path now the most probable path