A Possible Glimmer of Economic Hope

A shift in the balance between better-than-expected and worse-than-expected economic data can herald a change in momentum. When most data arrive weaker-than-forecast, that often is an early detector of an absolute deterioration in real economic trends to come. And for economies in recession, one of the first signs of light at the end of the tunnel will be a tendency for more and more data to arrive on the high side of expectations or above.

In December, practically every piece of data, regardless of the country of release, did worse than forecast, even as analysts ratcheted their gloominess higher. Recently, however, a number of indicators have produced pleasant surprises even while staying very depressed in absolute terms. Sometimes there is a technical explanation for the surprise, such as with British retail sales, which rose 1.6% in the latest report versus a forecast drop of 0.6%. But there have also been better-than-predicted results with no obvious reason. U.S. existing home sales rose 6.5% instead of falling 2.0%. The British distributive trades index recovered to -47, still very low but not as much so as a consensus prediction of -53. Italy's consumer confidence had a reading of 102.6, well above the forecast 99 score. Germany's IFO business climate index had been projected at 80.6 but was announced as 83.0. Previously, the ZEW survey of investor sentiment toward Germany had produced improvement to -31, not further deterioration to -44. French business sentiment stayed at 73 instead of dropping to 71. The preliminary January PMI readings for Euroland - 34.5 for manufacturing, 42.5 for services and 38.5 overall - compared favorably against consensus expectations of 33.2, 41.5, and 37.5. If growth is not as poor as imagined, inflation might not fall as quickly and far, either. The fact is that most price data, like the previous majority of indicators of activity, have been lower than assumed. But an exception reported today was the Australian fourth-quarter PPI, which was 6.4% greater than a year earlier versus a consensus estimate of +5.0%.

I remain very pessimistic about the world economic outlook. So does the IMF, which recently modified its 2009 growth forecasts to +0.5% for the world from 2.2%, -1.6% for the U.S. from -0.7%, -2.0% for Euroland from -0.5%, and -2.6% for Japan from +0.6%. Midyear strikes me as too early for the onset of economic recovery. That being said, the appearance of more data that are better, not worse, than forecast bears close watching and might give reason to reassess the current deep pessimism if the tendency continues. Even as data will remain very depressed in the late stages of recession, they will begin to trend a little better than expectations. A related area to watch is the behavior of markets. It will be a good sign if the Dow's 7552 closing low on November 20th holds. And if the dollar becomes an object of more consistent selling pressure, that too would probably be a sign of investors being more confident about the end of the global recession.

Larry Greenberg
CurrencyThoughts