Tuesday, September 30, 2008

Back to basics: Global economic indicators look bad

In anticipation of the U.S. employment report that releases on Friday, I decided to look at labor market conditions for several key global economies. Unemployment is rising in key economies and leading indicators indicate a broad-based economic slowdown. A global slowdown is not a common occurrence; it will require a joint expansionary effort to jointly pull international economies out of this rut.

Here is a report about Japan’s labor market, released yesterday:
“Japan says the country's unemployment rate rose slightly in August, adding to growing evidence that the world's second-largest economy is faltering amid a global slowdown. The unemployment rate stood at 4.2% in August, the highest level in more than two years and up from 4.0% in July.”
This is a common release, one that states a negative trend in an economic indicator (labor), and then places the trend in the context of some record-breaking news.

Here is a similar report about the Irish economy:
“The economy had shrunk by 0.3% in the first quarter of the year. Technically, a recession is defined as two or more successive quarters of negative growth. It is the first time Ireland has experienced a recession since 1983.”
There are a slew of reports out there, especially about the U.K. and the U.S., but overall, the global economic sum is teetering on recession.

The Labor Market

The labor market is very important in defining a recession (which, by the way, is NOT simply defined as 2 consecutive quarters of negative GDP). The U.S. employment report on Friday is expected to bring some pretty grim news: -100,000 jobs lost and the unemployment rate sticking at 6.1%. This is a reasonable number since the auto industry’s problems have worsened, the unemployment claims are super elevated, and credit issues make it unlikely that jobs are being added. Thus, the report will show the ninth consecutive monthly decline in jobs, which has never happened during a non-recessionary period.

But enough about the U.S., what’s happening across the globe?

The chart above represents the unemployment rate across five key economies. The first thing to note is that global unemployment rates do not always move in tandem. It is completely feasible for Canada to be growing above potential (unemployment is low), and Germany to struggle with rising unemployment, as it was in the 2003-2004. A global unemployment slowdown is not a common event. In all of the economies, except for Germany, the unemployment rate has risen in the first half of 2008. Also note that the economic slowdown started long ago - in the first half of 2008 when unemployment rates were rising (ex Germany, who is seeing its labor market strengthen) - and is not the product of the latest two weeks of banking reports.

If I had to compare, I would say that Canada is in the best position relative to the other countries in the sample. With its strong Petrodollar (and commodity) inflows, Canada has been quite resilient in spite of its struggling manufacturing sector and economic debacle to its South. Further, the strong inflows have kept the Canadian dollar strong and put a lid on core inflation, which rests at 1.5% for four consecutive months.

A broader measure of economic strength: The Organisation for Co-operation and Development’s (OECD) leading economic indicators index (LEI):

I believe the LEI index to be a lagged composite of macroeconomic and financial indicators, rather than a forward-looking indicator, but it does offer a common measure of economic strength/weakness. It uses slightly different components for each economy, but the composition of the LEI for each country is similar that in the U.S. (the + or – means that the component improved or reduced the LEI for the latest data point, July):
  • Spread 10-yr to federal funds rate (+)
  • Michigan consumer sentiment: expectations (+)
  • S&P 500 (+)
  • Consumer goods orders (+)
  • Real M2 balance (money supply) (-)
  • Real non-defense capital goods orders (-)
  • Factory Workweek (-)
  • Initial Claims (-)
  • Building permits (-)
  • ISM (manufacturing) supplier deliveries (-)

Overall, the economies have moved into a slowdown phase, and this indicator is lagged (latest data point is July). However, it does confirm a joint economic struggle, which is not always the case (see late 2007), dating back to April 2008.

My conclusions

The U.S. labor report is one of the most important indicators followed by markets, politicians, and economists alike. It is the first data release for the month of September and is not expected to paint a pretty picture of releases going forward. With a weak employment report, consumption is likely to be measly, income is likely to be suffering, housing variables will surely struggle, etc.

The U.S. is not alone; however, it has led many economies into their own slowdowns. A global slowdown is an occurrence that will require joint expansionary policy (and some new regulations by some) on the part of global governments and central banks in key developed economies to jointly pull the sum economies out of this rut.

Rebecca Wilder


  1. It is interesting each month to see what the stock market does upon release of this report. The reaction is usually to the difference between what they anticipate and the actual numbers and not the difference from the previous month. And sometimes, just to be contrary, they react as if nothing had occured.

  2. Do you think they (whoever "they" are) will change the official definition of a recession? Two months ago "despite not officially being in a recession, although it certainly feels like one" was literally a catch phrase use in every news story or blog post that mentioned current economic conditions. It's a fact, we're in a recession, we are not moving forward as a country, we're moving backwards.

    All of the sudden Germany has emerged as the 'it' country. I rarely ever heard their name mentioned, and as soon as the financial turmoil in the US begun, I've been seeing Germany's name mentioned everywhere. I guess they're in the best shape out of everyone else? Feel free to explain.

  3. Hi Tim,

    First, "they" is the National Bureau of Economic Research. I heard that phrase, too, but it takes the NBER several quarters or up to a couple years (the 2001 recession was not dated until 2003) to actually "date" the recession. So one can never say whether or not we are actually in a recession until the dating committee says so. But no, I don't think that they will change the following definition (which I copied from the NBER website at http://www.nber.org/cycles.html) because it looks at a whole slew of variables - including GDP - to judge an economic turning point, rather than just one measure, GDP:

    "The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."

    On to Germany.

    The German economy is strong(er) because of its resilient labor market and rather resilient export sector, given the recent surge of the Euro. The labor market is stronger than its European counterparts; the economy added jobs (29k new jobs found in September) and the unemployment rate continues to decline. Alternatively, the labor markets in the U.K., Japan, and the U.S. are deteriorating quickly. But more importantly, and compared to other European economies, Germany’s inflation rate has stayed rather tame, 3.07% in August, compared with Italy 4.4% y/y and U.K. at 4.8%. So when inflation subsides further, Germany consumption will be set to explode as wage income continues to rise under the expanding labor conditions. Further, German exports, which constitute a sizeable share of GDP and are much bigger than in the U.S. exports (a.k.a., German growth is heavily dependent on exports), are set to rise again as the Euro stabilizes at its lower value. This is not to say that Germany is in the safe zone! It experienced negative growth in Q2 (-0.5%), and Q3 is also expected to be weak. But once inflation subsides, consumption will have a chance to kick in and exports will rebound a bit with a relatively weaker dollar.



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