First in, First Out? U.S. Leading OECD Out of Recession 14 comments
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From the enthusiasm of the equity markets in the last few months, one would think that the global economy has gotten back onto its feet. In my last look at global trade, the U.S. had been showing signs of stabilizing at about $200 billion per month. Through the first five months of the year, exports of U.S. goods are down 22% to roughly an $80 billion monthly rate while imports have dropped more than 30% to a rate of $120 billion per month. While the U.S. numbers appear to have stabilized including an uptick in June, trade figures for other industrialized nations have declined since March.
A return to ‘normal’ trade levels is far away but movement towards those levels has both positive and negative implications. On the positive side, it is a reflection of economic healing both in the U.S. and abroad. On the negative side, it is likely a return to chronic trade deficits that weaken the U.S. dollar and increase the holdings of U.S. debt abroad. For better or for worse, the June trade figures released today point to a solid stabilization in trade if not the beginning of a recovery but no such trend is evident elsewhere.
How can this be reconciled with asset markets (stocks and commodities) in an upward trend? First asset markets are a reflection of investor confidence of the future. Mostly, though, you can credit corporate behavior in the face of adverse conditions. The latest round of quarterly earnings in the U.S. (reflecting the quarter from April to June ‘09) was a series of surprises to the upside. Profits recovered not because of revenue growth but because of cost reductions.
Global trade is more closely correlated to corporate revenues rather than profits. With that trade at best trending flat, revenues will remain stagnant. Around the globe, costs for millions of workers have been shifted from corporate to government expenses. This has improved corporate profits but also caused government deficits to balloon around the world. We have simply shifted a portion of the workforce from one set of books (corporations) to another (government unemployment).
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EU trade is still sliding. Trade to and from the European Union followed a pattern of declines from October ’08 through February of this year similar to the U.S. However, after an uptick in March, European external trade has continued to slide. Detailed figures are only available through May but preliminary retail trade figures show another 2% drop in the EU zone. This suggests that a bottom had not been reached through June ’09.
European financial institutions have historically operated with leverage levels that are even higher than American banks. In addition to the deleveraging that must go on in Europe (along with the U.S.), Eastern Europe remains particularly weak. The Baltic states of Estonia, Latvia, and Lithuania, for example, are suffering the hangover from a property-bubble and lending spree that makes the U.S. subprime mess look tame. The strong Euro, to which these countries peg their currencies, only hastens the problem. While these three are not EU countries, their plight has an effect on their EU neighboors.
Canadian trade surplus is no more. Canada has served as a model for fiscal soundness and financial regulation during much of this decade. CIBC (CM) was the only major Canadian bank to see write downs on par with its American and European peers. With surpluses in trade and government finances, it is hard to take issue with the Canadian economy. However, the last year has shown that Canada had been capitalizing on positive global trends through 2008 rather than uniquely positioned in some way.
Rising prices in commodities and energy throughout much of the decade has boosted exports. Canada, not the Middle East, is the largest supplier of energy to the U.S. This combined with easy access to the American consumer through NAFTA has allowed Canada to run a current account balance all years of this decade through 2008. That surplus in trade has evaporated and overall trade with Canada remains in a downward trend.
Chinese surplus can’t keep Australian exports rising. A few months ago, I wrote about the impressive contrarian trend in Australian exports led by raw materials shipments to China. That trend peaked in March and Australian exports are hitting new lows for the year despite shipments to China running at rates far above those of 2008.
Australia, so far about the only industrialized nation to skirt a serious recession, benefited from a strong rebound in most metals prices this year. Now, in addition to slack demand around the globe, they face two recent problems. First, the stockpiling of raw materials in China has run its course. Going forward, demand for its iron ore and coal will be more closely linked to what Chinese factories produce and sell rather than what they accumulate. Secondly, the contentious price negotiations between Australian miners and Chinese steel mills have concluded with price concessions of more than a third. BHP Billiton’s (BHP) earnings released today reflected as much.
Japanese trade has recovered some yet remains very weak. Japanese exports have taken the largest plunge of any of the large exporting nations, down 54% from peak to trough. Despite a recovery to the ¥4 trillion level, each month this year has been running at a minimum of 40% decline from the prior year period. Japan is exporting at levels not seen since 2003. By comparison U.S. and EU monthly exports are on par with figures from 2006 and 2005 respectively.
With Japanese exports so dominated by automobile shipments to the United States, I would expect to see export numbers pick up further by the end of the summer. This would simply be on the back of the successful ‘Cash for Clunkers’ stimulus program in the U.S. Companies like Toyota (TM) benefited greatly from the program. But as that program has a finite budget, the likelihood of a sustainable recovery is far from certain.
Japan is a large exporter of complex materials to China such as chemicals, plastics, and manufactured steel. Such shipments remain off 15% to 30% of 2007 peak levels despite robust Chinese growth.
If the first-in, first-out argument is correct, the United States will be the first of the industrialized nations to emerge from the recession. Global trade is just one indicator but it is one less susceptible to questionable government assumptions. There are no price deflators (used in GDP calculations) or assumptions about number of workers that have left the workforce (used for unemployment calculations). Trade figures reflect no ‘V-shaped’ recovery or apparent boost from inventory rebuilding. However, of the industrialized countries, the U.S. is showing signs of stabilization and possible rebound. Trade of other industrialized nations remains in a downward trend through May or June.
Disclosure: No positions
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erm, what about Norway?
THAT caused the problem; and it is still present. We will see more destruction of the credit supply, and resulting havoc on various exposed participants, and sooner than later.
I wouldn't bet the farm on it!
Where has all the industrial production gone? Jobs gone? Home equity gone? Trade surplus gone? Foreign reserves held gone?
In the words of Peter Shiff, "We are not the engine, we are the caboose and we are being cut loose".
Start practising your good bye wave! The future is debt, debt, and more debt. The people themselves recognize this and are beginning to deleverage themselves in a big way. Unfortunately this process will take years as their government piles more debt on their backs and the backs of their children and grand children.
Suggests to me that Chinese growth might not be quite so robust as you believe. This is a big trade, so 15 to 30% is a big number. Nobody else has picked up this trade, so the evidence suggests it just doesn't exist any more. It's hard to reconcile that with Chinese growth of 8%.
France and Germany are also showing the impact of large government stimulus programs and may, as of statistics released today (13th) technically be out of recession. It's not too surprising that when enough government money is pumped into an economy there will be an uptick in economic activity.
The next challenge is to see whether sustainable economic growth will take over the task currently being played by all of the stimulus programs and loose monetary policy.
The central bankers will be in no hurry to remove the drip feed to the financial system no matter how yesterdays's FOMC statement is spun and the BofE and ECB seem less convinced about the uptick than the politicians who have to seek re-election in the next year.
On Aug 13 01:41 AM Moon Kil Woong wrote:
> America is already the first economy to competely offset a weak economy
> through debt, government spending, and fiscal easing. Whether or
> not that will translate into real growth or just a nightmarish collapse
> of the dollar, persistent and growing deficits, and inflation is
> still yet to be determined. What I can say is the US is making a
> bigger gamble that the Koreans did when they nearly bankrupted themselves
> betting on DRAM. After all, at least their government was gambling
> on something tangible, not just dumping it into giant pits called
> Citibank, Fannnie Mae, and Feddie Mac.
Germany's GDP grew by 0,3% in Q2, better than expected ( - 0,2%).
1% groth is now predicted for Q3.
What is certain is that the actions taken will result in more real growth than if nothing was done. No, it's not a perfect solution and yes, it makes some things worse; but its the only feasible option. What's more, the benefits are starting to be seen.
On Aug 13 01:41 AM Moon Kil Woong wrote:
> America is already the first economy to competely offset a weak economy
> through debt, government spending, and fiscal easing. Whether or
> not that will translate into real growth or just a nightmarish collapse
> of the dollar, persistent and growing deficits, and inflation is
> still yet to be determined. What I can say is the US is making a
> bigger gamble that the Koreans did when they nearly bankrupted themselves
> betting on DRAM. After all, at least their government was gambling
> on something tangible, not just dumping it into giant pits called
> Citibank, Fannnie Mae, and Feddie Mac.
Wrong. They are a complete reflection of when a government gives tax money to investment banks, and money center banks and says: Here, trade it, make the markets go higher.
It is going to take time for the following realization to occur and for people to accept it:
The US is no longer the world's driver of economic growth and real production. We sold that out over the past decade for easy money and a population that lived 200% over their means.
I found it comical that the author did everything he could to "knock down" other countries such as Canada while trying to portray America as the nation to lead in the future. Comical to say the least. That's not to say that some other countries do not have their share of troubles but it is obvious there are way to many people who think that because we threw so much money at the nation's problems that somehow we are going to come out on top.
Printing more dollars just doesn't make sense.
So, it can not be a way of salvation, (I wish it was that easy.}
My guess is that this "Global Economy" thing is not going to work quite well for US. Just imagine, a worker in an American Factory matching the wages of a worker in a Chinese Factory.
And why not? According to our Constitution all people are equal.
So, following the fair distribution of wealth between equal people in a "Global Economy", we must get much poorer, in order to blend our economic practices with our own Constitution.
Some would argue, that an American worker is much more productive. I'd seriously doubt it, having in mind all union obligations which made GM collapse.
After all, assembly line work is all the same all over the world.
Electricians, welders, engineers, computer programmers, doctors,,, all these people do the same work all over the world.
But in USA, the wages are much, much higher.
So in this Great Land Of Opportunity Of Ours, we're outsourcing.
Maybe, in the future, the outsourcing will bring some measure of prosperity by some political magic (Tariffs and Taxes come to mind) , but currently we're just losing it.
On Aug 13 01:36 PM chap08 wrote:
> There can't be a "nightmarish collapse of the dollar" because a)
> everybody else is adopting the same combo of "debt, government spending,
> and fiscal easing"; and b) any collapse in the dollar would be a
> pleasant surprise and a big help. If it also brings inflation then
> so much the better because that is the first step on the road to
> salvation.
How can you think the US will lead Australia out of a recession if we were never in one?
The only thing the US will lead out of is the bear market rally.
It's laughable, i think you have been watching too much CNBC.
1. If the US recovers and starts doing business like it once did, Canada's exports will increase in kind.
2. If you compare the trade surplus to the price of oil and other commodities, you can see that the trade surplus does not narrow until commodities prices start to fall off, starting around August '08.
The combination of a U.S. recovery and an increase back to astronomical levels of commodity prices, if it happens, will likely push these indicators apart again.