Weekly Macro Comment Mind The Base Effect

7 September 2009

Weekly Macro Comment Han de Jong, Chief Economist

Mind the base effect •

Global rebound manufacturing continues

•

US payrolls not fantastic, but improving

•

No early exit from stimulus policies, but perhaps still earlier than many expect

The global manufacturing rebound is progressing well. This

South Korea: Industrial production

time a year ago, economic troubles intensified sharply and production fell off a cliff between September and February. With things now improving, the year-on-year comparisons for many economic indicators will become very easy in the months ahead. This will mean that we are going to see some amazingly strong numbers on a yoy-basis, particularly as far as industrial production in Asia is concerned, but elsewhere too. To some extent, the yoy numbers will (positively) exaggerate what is actually happening. It is probably better to watch the trend on a month-to-month basis. That is still going to be good in my view. Last week’s economic data was generally positive, but some

% yoy

20 10 0 -10 -20 -30 2003

2004

2005

2006

2007

2008

2009

Source: Bloomberg

soft areas remain. Policymakers are, predictably, trying to stress that their stimulus measures are not going to make an

Further signs of industrial confidence in Asia came from

early exit and that they have everything under control. We will

Singapore where the PMI rose strongly: 54.4 in August from

see.

51.5 in July. Apart from a single fluke number in 2006, the August reading was the highest since 2004. The PMIs in the

High industrial confidence

eurozone also showed strength in August, but remained below

As we have been more optimistic than the consensus about

50. The manufacturing PMI for the eurozone rose to 48.2 in

economic prospects on a 12-month horizon, we were pleased

August, from 47.9; the services PMI rose from 49.5 to 49.9.

to see that the August US ISM for the manufacturing sector was much stronger than expected. The index rose from 48.9 to

Singapore: PMI

52.9, the first reading above 50 since January 2008. In fact, you need to go back to early 2006 to find the index clearly higher than the August reading. We expect the index to rise

index

58

further in the months ahead and we expect real economic data

56

in the US and other western economies to follow. The non-

54

manufacturing ISM also outperformed expectations, rising from

52

46.4 in July to 48.4 in August. It is clear that manufacturing is

50

leading the recovery. Another sign to this effect can be found in last week’s numbers on Korean industrial production. In July, production was 0.7% higher than in July last year, the first positive yoy-reading since September 2008. This is meaningful as it shows real strength. Because of base effects, production growth should accelerate sharply on a yoy basis in the months

48 46 44 2003

2004

2005

2006

2007

2008

2009

Source: Bloomberg

ahead. I would be very surprised if Korea did not achieve something like at least +30% production growth in December.

Japan’s industrial production increased strongly again in July: 1.9% mom, the fifth monthly rise. Since the trough in

HAN DE JONG +31 (0)20 628 4201

ECONOMICS DEPARTMENT

7 September 2009 production, output has grown some 20%. Nevertheless,

them to fall. In addition, some parts of the Japanese economy

production was still down 22.9% yoy, but that was considerably

continue to be weak. The unemployment rate has risen to

better than the low of -38.4% in February.

5.7% in Japan. This may sound comparatively low, but it is unprecedented in that country. Vehicle sales and home sales

US pending home sales were also stronger than expected.

are also soft in Japan.

This may be due to the tax credit for first-time buyers which will

Another area where I would like to see further improvement is

expire before the end of the year. Nevertheless, many US

international trade. Asian countries were hit hard by the

housing market indicators have improved recently. On a yoy

collapse in world trade. Their export and import numbers were

basis, US pending home sales were actually the strongest

falling at a pace of 30% or worse. In recent months, these

since 2004.

numbers have stabilised but they do not display a positive trend on aggregate. That means that imports and exports are

US: ISM – employment

growing at the same pace as last year prior to Lehman, but that is not really good enough. The yoy-rate of change will

index

improve in the months ahead as the comparison with 12

60

months earlier becomes easier; the base effect. The fact that

55

exports and imports are not really accelerating would appear to

50

be consistent with the Baltic Dry index (measuring freight

45

costs) which has weakened in recent months.

40

No early exit

35

Various international agencies, such as the OECD and the IMF

30

are urging policymakers not to change direction on their

25 90

92

94

96

98

00

02

04

06

08

stimulus policies any time soon. Still, various policymakers are trying to explain their approach to exit strategies while also stressing that it is too early to implement them. Central bankers

Source: Bloomberg

are generally committing to loose policies for an extended US labour market continues to shed jobs, but at a reduced

period. I continue to believe that policymakers are going to err

pace.

on the side of being ‘too late’ rather than ‘too early’. Having

The US economy has been shedding jobs since January 2008.

said that, as we believe economic conditions are set to

It lost another 216,000 in August. And the unemployment rate

improve more than generally assumed, we also think that the

jumped unexpectedly from 9.4% to 9.7%, the highest since

first steps in the tightening process may still come a little earlier

1983. Nevertheless, we would label the report ‘mixed’. The

than many assume, as policymakers may be forced to respond

loss of 216,000 jobs made August the best month since August

to better than expected data.

2008. In addition, 216,000 was a little better than expected, although there was a revision to previous months of some 50,000 in the wrong direction. The data on the duration of

Due to a short holiday, there will not be a weekly comment

unemployment improved. The employment subcomponent of

next week

the ISM survey has risen sharply in recent months, showing the

strongest

post-recession

improvement

in

decades,

although it must be said that it had fallen to extremely low levels. At face value, that should mean that the labour market should pick up soon. Some negatives While I am positive on the economic outlook, one must not lose sight of the weak spots. When it comes to the labour market, US initial jobless claims are still stubbornly high. We need Important information The views and opinions expressed above may be subject to change at any given time. Individuals are advised to seek professional guidance prior to making any investments. This material is provided to you for information purposes only and should not be construed as an advice nor as an invitation or offer to buy or sell securities or other financial instruments. Before investing in any product of ABN AMRO Bank N.V., you should obtain information on various financial and other risks and any possible restrictions that you and your investments activities may encounter under applicable laws and regulations. If, after reading the brochure, you consider investing in this product, you are advised to discuss such an investment with your relationship manager or personal advisor and check whether this product –considering the risks involved- is appropriate within your investment activities. The value of your investments may fluctuate. Past performance is no guarantee for future returns. ABN AMRO Bank N.V. has taken all reasonable care to ensure that the information contained in this document is correct but does not accept liability for any misprints. ABN AMRO Bank N.V. reserves the right to make amendments to this material.

HAN DE JONG +31 (0)20 628 4201

ECONOMICS DEPARTMENT