Lok Sang Ho's  Instablog

Recently Prof. Roubini predicted that the US housing market is still going to head down, notwithstanding recent recovery in prices and in turnover.  Whitney Tilson, founder of T2 Partners agreed, saying that he was "confident this is the mother of all head fakes."

Tilson points to the following reasons for the sudden upturn in housing.

More »

More »

There is still debate about whether the US economy is really recovering, and there is a lot of concern about the sustainability of the recovery.

More »

The global recession is coming to an end.  China grew at 7.9% in the second quarter and expects the pace to pick up to more than 8% in the third quarter. Singapore registered a 20.4% growth rate(annualized) in the second quarter.  Hong Kong’s (annualized) growth rate was somewhat less impressive, but still made 13.9%.  Japan's real gross domestic product grew at a pace of 3.7% per year.  Even in Europe, several economies are showing signs of recovery or have already registered positive growth.  The largest two economies, Germany and France, each grew at an annual rate of 1.2%.  Even though the UK economy still shrank at an annual rate of 3.2% in the second quarter, it is actually faring even better than most of the other European economies, as it had not declined nearly as much, and as its unemployment rate is much lower too, at 7.8% in the April-June period.  More important, the leading indicators are pointing in the right direction, with the manufacturing PMI exceeding 50 for the first time in months, standing at 50.8 in July.  New orders were rising for the first time since March 2008, and they were broad-based.  The PMI for services was even stronger, hitting 53.2 in July, up from 51.6 in the previous month, suggesting positive growth in the immediate future.

 

But many skeptics who will not accept a recovery in the United States point to rising unemployment and sagging domestic consumption.  They ask: if people are not buying and are still losing their jobs, where does the growth come from? 

 

The answer is overseas.  And an exports-led recovery is exactly the ideal course of the recovery for the United States.  The most recent Philadelphia Fed Business Outlook Survey's future indicators showed notable improvement in August. The future general activity index increased from 18.0 to 27.6.  The indexes for future new orders and shipments also rose 15 and 11 points respectively.  The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, increased from -7.5 in July to +4.2, which is the highest reading of the index since November 2007. 

 

When the exports-led recovery gathers momentum, unemployment will start falling, and with more people employed, domestic consumption will pick up.  There is a case to be made that the US needs a higher savings rate, as I have argued before.  Recent developments are pointing exactly to this direction.  So do not be disheartened if domestic consumption does not immediately rise.  As long as US exports continue to grow, and as long as the housing market continues to stabilize, gains in employment and revival of consumption is just a matter of time—and I would say: months. 

 

An exports-led recovery in the United States is the most ideal, as it is more sustainable, given the excessive indebtedness of the country.  Americans need to mend its ways of overspending, while households in Asia and elsewhere need to open their purse more.  People have been talking about the global imbalances for a long time.  This is the time to address it, and the signs observed so far are good.

The US dollar jumped at the "strong" job market numbers last Friday.  "Strong" was of course only relative to expectation, because the US still lost 247,000 jobs in July.  But the-better-than-expected non-farm payroll figures provided yet the strongest signal for an imminent economic recovery in the US.

It is not clear if this is another round of strength for the US dollar or just a temporary surge.  If the US dollar does continue to gain strength, however, not only is the US recovery endangered but also the gross global imbalance that had emerged since the eighties probably had to wait much longer to be redressed.

US household savings rates had been rising in recent months suggesting that the impending recovery is likely to be quite unlike earlier ones--with weak consumption.  This clearly is exactly what the US needs: it has to live within its means.  The years of large current account deficits just cannot continue forever.  

For the US economic recovery to be real, therefore, US needs to boost its exports, and that means the US dollar should weaken.  External demand has to gain while domestic demand ebbs.  

A "policy of strong US dollar" is just unrealistic for the US economy.  With a weaker US dollar, employment will rise and aggregate consumption can and will rise, but the American savings rate needs to edge if it is to repay its foreign debt and deal with the gross external imbalance.

I am hoping for a moderately lower US dollar, but I do not think the US dollar would crash or need to depreciate a lot.  But as I have maintained in earlier writings, the often cherished presumption that freely floating exchange rates would always serve the world best is just unrealistic.

The discussions about green shoots had invited a lot of skepticism.  By now, however, the recovery appears to be well under way.  There is little doubt that third quarter will bring in positive growth, which should carry over to the last quarter and beyond.

 

One of the key statistics that tells about the future that I watch closely is the ISM indices.  Overseas, the Canadian index shot up to 58.2 in June from May's reading of 48.4.  In UK the ISM index hit 50.8 in July, up from 47.4 in June.  In Asia, The official Chinese PMI improved slightly in July to 53.3% from 53.2% in June, having been in the expansionary zone of higher than 50% for five consecutive months, indicating continued expansion of the manufacturing sector and recovery of economic activities in China.  The purchasing managers' index in Hong Kong rose to 49.9 in July from 47.1 in June.  China is confident its growth this year should be north of 8%.  India, Asia’s third-largest economy, will probably expand 6.5% in the year ending March 31, the Reserve Bank of India said.  This forecast compares to an earlier estimate of 5.7 percent gain. The Singapore economy actually grew at an astonishing 20% plus in the second quarter!

 

The US Institute of Supply Managers Index for manufacturing was higher than expected in July, reaching 48.9.  According to a commentary on the official website, "The past relationship between the PMI and the overall economy indicates that the average PMI for January through July (40.6 percent) corresponds to a 0.2 percent decrease in real gross domestic product (GDP). However, if the PMI for July (48.9 percent) is annualized, it corresponds to a 2.4 percent increase in real GDP annually." 

 

Skeptics point to the mounting debt, the still rising unemployment numbers, and the apparently unstoppable surge in home foreclosures.  Yet do not underestimate the effects of psychology.  Just as the loss of confidence directly triggered the credit crisis, so the return of confidence will bring about real, positive effects throughout the economy.  Already the housing market has shown clear signs of stabilizing: rising prices and transaction volumes in many cities.  Toxic assets are becoming less toxic.  And with the return of confidence the US dollar is depreciating, lending further support to American exports.

 

As the economy is recovering faster than expected, the fiscal deficit will narrow.  I am optimistic that the unemployment rate will peak much sooner than expected.