Over the summer months, all attention will be focused on a more precarious world economic outlook.
Three problem areas need resolution:
1) means must be found to deal with the fiscal debt problems of so-called “peripheral” nations in Europe (Greece, Portugal, Ireland, etc.);
2) first steps are needed to straighten out the government’s finances in Washington while avoiding a hard crash into the legislated debt ceiling;
and 3) China’s overheating economy should be cooled through restrictive monetary measures, but these mustn’t be so severe as to bring on a hard landing.
There is one key question for the moment. Is the current slowdown a temporary aberration or a sign of worsening conditions to come longer term?
In May, the purchasing managers’ index (PMI) of the Institute of Supply Management in the U.S. suffered a large drop, from 60.4% to 53.5%.
That led to worries about an imminent end to the long period of expansion in the U.S. manufacturing sector.
Thankfully, the June PMI result allayed the concern.
In the latest month, the ISM’s gauge made a turnaround and moved back up to 55.3%.
A PMI reading in excess of 42.5% but below 50.0% means the whole economy is expanding but manufacturing is still lagging. Above 50.0%, both the economy and manufacturing are growing.
According to the ISM, a PMI level of 53.5% has historically corresponded with “real” (i.e., after inflation) gross domestic product (GDP) growth of 4.5%.
This confirms what many analysts have been saying. Industrial output in spring through early summer of this year was adversely affected by the after-effects of the tsunami in Japan.
Factories north of Tokyo were damaged and ports left unable to function for several months.
Parts shortages in cars, electronics and a range of components caused production cutbacks that held back growth in many nations, not just Japan. That’s because supply chains have become international in scope.
The PMI is a composite of five diffusion indices (i.e., positive minus negative survey responses on new orders, production, employment and so on) for the manufacturing sector.
With the latest PMI result, the U.S. economy has been expanding for 25 straight months and manufacturing for 23.
Japanese rebuilding efforts are beginning to accelerate. This will pull in products and services from around the world, but the closed nature of the Japanese economy will limit the gains to less than they might otherwise be.
In a catch-up move, Japanese industrial production in May rose at its fastest pace in more than 50 years. Much of this was delayed fulfillment of orders and inventory rebuilding.
Looking further ahead, Japanese exporters would like greater assurance there will be a strong international marketplace in which to sell their goods.
They’ll have to wait and see like the rest of us.
The latest initial jobless claims report in the U.S., for the week ending July 2, provided a continuation of the mediocre numbers being reported since early spring.
The level of first-time unemployment insurance seekers fell by 14,000 but at 418,000, it remained resolutely higher than it should be if significant cuts to the unemployment rate are to be achieved.
For Canada, in this period of overall uncertainty about the world outlook, it’s important to keep an eye on home prices.
They will serve a role similar to the canary in the mine shaft, in terms of warning about a possible poisoning of the atmosphere.
Confidence in the future is closely tied to the housing sector. As long as home values are increasing, that’s a sign employment and incomes are being sustained.
On this score, Statistics Canada’s latest new housing price index results are soothing. The overall index rose 0.4% from April to May, which was even faster than in the previous period (+0.3%).
On a year-over-year basis, new home prices in Canada were +1.9% in the latest month, made up of “house only” at +2.0% and “land only” at +1.7%.
With respect to cities, the top year-over-year gainers were: St. John’s, +4.7%; Toronto, +4.3%; Winnipeg, +4.1%; Kitchener-Cambridge-Waterloo, +3.8%; Montreal, +3.6%; and Regina, +3.4%.
Six urban centres recorded year-over-year declines in new home prices, with the three most dramatic drops coming in Windsor (-4.4%), Victoria (-1.7%) and London (-1.3%).