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Despite all the economic worries that investors seem focused on, the data in the U.S. and Canada continue to show economies that are regaining momentum after the second quarter slowdown which, in turn, was hurt by the Japanese earthquake in March and its resultant impact on global supply chains for key industries such as automobiles and semi-conductors. This week’s reports show that the U.S. data on employment, retail sales, consumer confidence, inventories and capital spending are all improving again. The chart below, which shows the ISM index for new orders less inventories, has begun rising again after seeing a peak in March of this year. This has been an exceptionally good lead indicator for overall economic growth as it generally signals when industrial production has to increase to meet demand.
Consumers are also back to spending again as the data shows; retail sales during Thanksgiving weekend climbed 16%, and shoppers spent $398.62 on average, up from $365.34 a year earlier. Web sales on Black Friday surged 26 percent to $816 million and 18% to $479 million on Thanksgiving Day. One reason that consumers seem comfortable spending again is because they have reduced their debt load somewhat over the past three years. Household debt in the U.S. declined by 0.6% in the third quarter as mortgage balances shrank. Consumer indebtedness fell by $60 billion from the end of June to $11.66 trillion on Sept. 30th. Mortgage balances declined by about $114 billion, or 1.3 percent. While these numbers are still large, the direction over the past two years shows a significant period of ‘de-levering’ by American households. Meanwhile, the Canadian economy grew at an annual pace of 3.5 per cent in the third quarter, as exports roared back after a steep contraction in the prior quarter. Sales abroad rebounded from a terrible second quarter that was marred by a host of one-time setbacks such as the effects of Japan’s natural disasters on North American supply chains, soaring at an annual clip of more than 14 per cent, the biggest quarterly gain since 2004. Overall economic growth also got a boost as energy production that was interrupted by wildfires in northern Alberta resumed. There was also a jump in housing-related investment.
The ‘fly in the ointment’ continues to be Europe, though, as the sovereign debt crisis undermines growth in the region. Bearish investors also fear that this ‘contagion’ will spread to the rest of the world, much like the U.S. financial crisis in 2008 ultimately lead to a global recession. The chart below shows the Eurozone PMI (Purchasing Managers’ Index), which tracks the expansion (indicated by a reading of 50 or higher) and contraction (below 50) of the region’s manufacturing sector. As can be seen, the PMI has slipped below 50 over the past few months and yet the European economy continues to expand. The consensus view is that the PMI is telling us that economic growth is about to go negative in Europe and will turn out to be an outright recession (which is defined as two successive quarters of negative economic growth).
While we can’t argue with the numbers, our view is that growth in Europe goes negative for only one quarter and that growth resumes but does remain subdued in 2012 (i.e. less than 1%). But what is more important, in our view, is that growth in this region has not been exceptionally strong for a long time, with the 10-year growth for the Euro-zone being less than 1.5%! Germany has been the strongest member and that has continued, with German growth remaining above that of France, Spain, Italy or any of the smaller southern economies. Europe still represents about 20% of the global economy but that share is shrinking. Bottom line is that Europe has not been the ‘engine’ driving the ‘global growth train’ for a long time and the fact that growth will go negative for a quarter or two and be slower than originally expected in 2012 will not ‘derail’ global economic growth.