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Tuesday, April 29, 2008

US And ROW Conference Board Measures

I am not a huge fan of Conference Board measures, but I do look at their Consumer Confidence Index:

Of course food and energy prices are the main factor producing these slides, and the current situation part of the survey is what has been producing the last few months of declines. Last year some consumer surveys tended to show that consumers were relatively comfortable with their own situations, but worried about the economy in general. Some economists and columnists were arguing that the pattern showed that consumers were just worried about news chatter, and that there really wasn't anything wrong with the economy. I did not feel that this was a valid claim because the shift to discount stores and pricing pressures at grocery stores were already clearly evident at the beginning of 2007. A change in that type of consumer behavior is not produced by media.

Regardless of the truth of that assertion, such a claim can no longer be made with a straight face:
The percentage of respondents intending to take a vacation over the next six months has fallen to a 30-year low, another sign of consumers turning more cost conscious.
I think consumer confidence readings are produced by a combination of the end of the housing piggy bank and the cost increases consumers are experiencing.

One of the reasons I don't rely much on the various Conference Board measures is that they mix derivatives like stock prices with other measures, and another is that what they consider a leading index I consider a coincident index. But since I am always trying to gaze into the crystal ball of the future (bank lending policies have to adjust for what is coming down the road - not what is happening), I have a much greater need than most for true leading data.

Nonetheless, I thought it would be interesting today to look at the US "leading" index compared to a few of ROW biggies.

The US:
The Conference Board announced today that U.S. leading index increased 0.1 percent, the coincident index increased 0.1 percent, and the lagging index increased 0.3 percent in March.

* The leading index increased slightly in March, following five consecutive monthly declines. Money supply (real M2)*, index of supplier deliveries (vendor performance) and the interest rate spread made large positive contributions to the index this month, offsetting the large negative contributions from initial claims for unemployment insurance (inverted), building permits and stock prices. During the six-month period ending in March, the leading index declined 1.6 percent (a -3.3 percent annual rate), and the weaknesses among its components have been very widespread.
Germany:
The Conference Board announced today that the leading index for Germany declined 0.9 percent and the coincident index increased 0.1 percent in February.

* In February, the leading index fell sharply again as stock prices, new orders in investment goods and consumer confidence all made large negative contributions to the index. In the six months since August 2007, the leading index has declined by 2.6 percent (about a -5.1 percent annual rate), down substantially from the first half of 2007 when its six-month growth rate reached about 4.5 to 5.0 percent (annual rate). The leading index has been down or flat in five of the last six months, and the weaknesses among the leading indicators have become more widespread than the strengths in recent months.
France:
The Conference Board reports today that the leading index for France declined 0.3 percent and the coincident index increased 0.2 percent in February.

* The leading index declined for the fifth consecutive month in February. New unemployment claims (inverted) and the stock price index made large negative contributions to the index this month. Index levels were revised slightly downward between September and January as fourth quarter data became available for the ratio deflator of value added to unit labor costs and as a result of revisions to unemployment claims. The six-month change in the leading index fell to -1.8 percent (about a -3.5 percent annual rate) during the six-month span through February, well below the six-month change of 1.6 percent (about a 3.1 percent annual rate) during the six-month span from February 2007 to August 2007. In addition, the weaknesses among the leading indicators have become very widespread.
Japan:
The Conference Board reports today that the leading index for Japan decreased 0.2 percent and the coincident index decreased 0.1 percent in February.

* The leading index declined slightly in February, and has declined in ten of the last twelve months. Stock prices, the six-month growth rate of labor productivity, and the Tankan Business Conditions survey continued to make large negative contributions to the index in February. With this month's decrease, the leading index has fallen by 2.9 percent between August 2007 to February 2008 (a -5.7 percent annual rate), well below its 0.7 percent decline during the first half of 2007 (about a -1. 4 percent annual rate), and the weaknesses among the leading indicators continued to be more widespread than the strengths.
It's extremely tempting to me to correlate Germany and Japan because they are, relatively speaking, economies that depend on manufacturing. Regardless, the annualized six month trend goes as follows:
US: -3.3%
France: -3.5%
Germany: -5.1%
Japan: -5.5%
The ROW countries are through February whereas the US is through March. If you go to the Conference board page you can see other countries. The reason I picked these countries is that France, Germany and Japan really were not greatly dependent on the housing bubble, in contrast to the UK and Spain. The UK and Spanish annualized six month changes are -2.5% and 2.0% respectively.

What is interesting to me about this is that any country which was bubbling is still showing relatively better performance by Conference Board measures, and that the degree of the bubble seems somewhat correlated with relative strength. The logical conclusion is that the true global effect of the credit cycle is not only not complete but barely beginning. In other words, there is still a lot of left-over credit impetus in these economies, and the implication would be that there is still a strong downward impetus on ROW for at least another year.

There is also no support whatever for a decoupling thesis. I always found that theory bizarre; one of the functions of credit cycles is to synchronize normally unrelated business cycles. On the way up that works wonderfully; on the way down it is quite uniquely painful. We are on the way down with much further to go.


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