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Leading Index Points to Continued Growth
Thu, Jan 21 2010, 22:32 GMT
The Conference Board’s Index of Leading Economic Indicators (LEI) rose 1.1% in December, marking the ninth consecutive monthly increase. The year-to-year change of the quarterly index advanced one quarter has a strong positive correlation with the year-to-year change of real GDP (see chart 1). The robust performance of the index points to continued economic growth.
In December, eight of the ten components made a positive contribution, while the factory workweek and orders of consumer durables held steady. The interest rate spread and housing permits made the largest positive contributions. Forecasts of real money supply, orders of consumer durables and non-defense capital goods are used in the computation of the LEI.
Initial jobless claims increased 36,000 to 482,000 during the week ended January 16. The Labor Department indicated that a backlog from the holidays accounted for part of the increase in initial jobless claims. Initial jobless claims have now risen for three straight weeks. Continuing claims, which lag initial claims by one week, declined 18,000 to 4.599 million. The insured unemployment rate held steady at 3.5%.
Continuing claims of extended benefit recipients lags initial jobless claims by two weeks. During the week ended January 2, the number of recipients of unemployment insurance under the extended benefits program increased nearly 613,000, while continuing claims under the regular program fell 190,000. Total continuing claims inclusive of both these components posted a new high (10.534 million) for the week ended January 9 These numbers continue to suggest that labor market conditions are problematic and the weakness in hiring is at the top of the priority list of policy makers.
In the two weeks leading to this morning’s Q4 GDP announcement, a variety of signals have been emanating from Beijing’s policy centers, all suggesting the economy was running a little warmer than preferred. Nobody wanted to confess to overheating or anything that could set off alarms, but quiet increases to treasury rates and higher reserve requirement ratios (as well as some unofficial verbal strongarming to curtail excessive lending ) suggested policymakers felt the markets needed a little tenderizing before today’s report. Considering the figures released this morning, tightening measures will be accelerated in the months to come, but possibly not by as much as is necessary.
The headline GDP figure came in at 10.7% year-over-year, above most expectations. This marks the third quarter of accelerating growth and returns the rate of expansion back to pre-crisis levels, but it would be hasty to suggest that the worst is past. From a strictly statistical perspective, the year-over-year Q1 figure will be significantly higher than Q4 if only because of base effects, when the lowpoint of the economy’s performance last year falls out of the on-year calculations. This factor alone could suggest growth at a disconcerting 11.5% or higher in Q1, and that is without any economic assumptions thrown in.
Furthermore, the impact of Beijing’s massive economic stimulus package has yet to fully run its course, last year’s runaway lending is still feeding into production, and a recovery in overseas demand means the net exports total is a greater contributor to total GDP. The inertia behind these pro-growth factors all but promises further acceleration in production, and with it the inevitable price pressures. The year-on-year rise in China’s CPI lags behind GDP growth by six months, and over the past ten years has held in tight step. Given the current economic growth trajectory and its implications for prices over the next two quarters, it is hard to see how policymakers would not be concerned about inflation above 5% by June and a real threat of economic overheating.
However, for now the National Bureau of Statistics (NBS) is holding fast to its base assessment that “the foundation of the economic recovery is relatively weak; (and) there are uncertainties in domestic economic development.” The NBS has made a few delicate shifts in other parts of its well-crafted statement, backing off from any emphasis on loose monetary or fiscal policies but not necessarily endorsing a shift to tightening or even a “normalization of the current policy environment,” as has become the new Asia-Pacific catch-phrase. This gradualist approach suggests that at least for now, policy tightening will only be through indirect means such as those applied over the past month – symbolic increases in treasury rates, modest hikes in the reserve ratios and occasional pressure on banks to cool down excessive lending. We do not expect any hikes in benchmark interest rates until at least Q2, and possibly not until the second half of 2010.
One form of tightening that is all but certain to be delayed is in forex policy, i.e. allowing the yuan to resume the slow, gradual appreciation halted in July 2008. With the yuan exchange rate kept level with the weakening dollar, battered Chinese exporters were tossed a lifeline during the worst part of the global economic crisis. But now with growth on the rebound, there are questions as to whether these companies can handle a less-competitive exchange rate and still stay afloat. This is where the NBS statement about a relatively weak foundation for the economy recovery plays a significant role – it offers crucial justification for maintaining the stable exchange rate in the near-term. As long as that statement remains a part of the Bureau’s economic assessment, the government does not have to consider any adjustment to the yuan exchange rate. We think that forex policy will be the last area to be “normalized”, and it will not happen until Q3 at the earliest. External pressures for appreciation will mount, particularly from China’s main trading partners who will throw around terms like “currency manipulation,” but nothing will come of it until Beijing is sure that exporters can handle the adjustment. By then, however, delays in tightening other policies may have already created other problems.