Wednesday, July 1, 2009

Daily Economic Briefing

We continue to make significant forecast changes. Revisions have been focused in the current quarter in Asia, reflecting a boom in IP growth. Last Friday, we raised our forecast for 2Q GDP growth in EM Asia to above 10%q/q, saar. Today we boosted our 2Q forecast for Japan to 4.5%. The main reason for the revisions is that Asian manufacturing output has boomed (probably about 35% annualized), in good part because of a surge in exports and because companies are liquidating inventory at a less rapid pace. There also are signs of stronger domestic demand in Asia. China stands apart, but data indicate that consumption is rising elsewhere as well (e.g., today’s reports on household spending in Japan and Korea). Inventory dynamics and a brighter forecast for the US and Europe (see below) suggest upside risk to Asian forecasts for 3Q as well.
• In the US and the Euro area, we revised down GDP growth for the current quarter, but up for the second half. Manufacturing output has yet to turn in these regions, where final sales are still falling (albeit much less rapidly) and the inventory adjustment remains intense (the US inventory dump is being exaggerated by developments in the auto industry). GDP is expected to lift in 3Q, however, as sales firm and companies destock less rapidly, following the pattern in Asia. Last Thursday we raised our forecast for US GDP growth to 2.5% in 3Q; today our Euro area team raised their 3Q forecast to 1.5% (from 0.0%) and their 4Q forecast to 2% (from 1.0%).
• The Conference Board’s index of US consumer confidence stumbled in June, falling from 54.9 to 49.3, after surging almost 30pts in the previous two months. The report tempered the more upbeat reading from the University of Michigan and stoked investor anxiety about the path of consumer spending.
• There were more hints that the slide in US house prices is moderating. The Case-Shiller index fell 0.9%m/m (sa) in April, on the heels of 2% declines in the previous seven months. The FHFA house price index more or less has stopped falling altogether. That said, barring an upturn in sales, prices likely will remain under downward pressure in the near-term from excess inventory. In the UK, the evidence for a recent stabilization in house prices is stronger (e.g., today’s Nationwide release), although our team remains skeptical of its staying power.
• The June business surveys continue to look upbeat, with today’s Japan PMI and Shoko Chukin indexes up solidly, along with the BoK’s survey in Korea, and US regional Fed surveys from Chicago and Milwaukee. Our manufacturing PMI is out tomorrow; there is a good chance the new orders index will top 50 for the first time since March 2008.