During last week markets spent much of their time wondering about US economic growth and waited for the figures on this subject which arrived on Friday. However there were other trends and factors at play. One which has caught my eye is the recent divergence between the US Dow Jones Industrial Average which closed on Friday at 10,465 and the Japanese Nikkei 225 index which closed this morning at 9570. I have written about cross-over points for these indices on this blog but currently we have a divergence of nearly 10% and it is curious to me that when we are worrying about growth in the United States it is Japanese shares which are underperforming. Also the recent march upwards in European interest rates stalled a little on Friday and it will be interesting to see if this is an end to the recent rises or if it is simply a halt before it goes higher. Three month Euribor ( European interbank offered rate) fell from 0.899% on Thursday to 0.896% on Friday. A small change but a change nonetheless.
US Economic Growth
The Bureau of Economic Analysis presented figures for US growth which gave several different messages on Friday afternoon. The simplest measure the headline figure which had US GDP rising at 2.4% in the second quarter would have led on its own to concerns that there was a slowdown going on in US growth. Not only was this number below expectations but it was lower than growth in the first quarter. Those that rush to a conclusion would be wise to consider that US growth in the 1st quarter was in fact revised upwards quite substantially from 2.7% to 3.7%. So now one could say that growth has slowed a fair bit or optimists could say that overall we are better off as the revision to the first quarter was higher than the disappointment in the second quarter. Just to add some further light on the change between the two quarters the BEA highlighted the differences.
The deceleration in real GDP in the second quarter primarily reflected an acceleration in imports and a deceleration in private inventory investment that were partly offset by an upturn in residential fixed investment, an acceleration in nonresidential fixed investment, an upturn in state and local government spending, and an acceleration in federal government spending
The negative impact from imports was expected and I have to confess the increase in state and government spending caught my eye as that is a similar trend to the UK. Those worried about the fiscal status of individual US states may well be worried about the implications of an upturn in spending by them.
However there is a third layer of analysis required. If we go back in time the BEA revised downwards figures for the period of the beginning of the credit crunch.
The percent change from the preceding year in real GDP was revised down for all 3 years: from 2.1 percent to 1.9 percent for 2007, from an increase of 0.4 percent to 0.0 percent for 2008, and from a decrease of 2.4 percent to a decrease of 2.6 percent for 2009.
So now the various moves have pretty much offset each other! A small underperformance in the headline figures followed by a large upwards revision to the previous quarter followed by downward revisions to past data! One might conclude that there was a lot of noise followed by little real action. Well might the Dow Jones close virtually unchanged!
These numbers ended up shining much less of a light on economic events than might have been hoped. One is left with the view that the US economy is in some sort of slowdown but let’s face it that was apparent before the numbers were published. One further number which came out on Friday for the US also confirmed this trend. There is a weekly index of leading indicators called ECRI which declined by 10.7%, now I am sceptical of leading indicators and weekly ones in particular but this one has now been predicting a decline for 8 weeks.
Looking at the detail leaves us with two troubling contributors to US growth. The first is essentially state spending which leads to the thought how much growth would there be without it? And the second is inventory growth which was strong in both the first and second quarter. As this year continues the US state will not contribute 0.9% to GDP growth and US inventories will fill up so a slowdown in the next two quarters looks likely.
Regular readers will know that I believe a level of healthy scepticism is wise when you analyse economic statistics. As an illustration of this please take a look at the numbers that the BEA has presented for US economic growth for the 1st quarter of 2010. They are 3.2%,3.0%,2.7%, and 3.7%. The American system of annualising these numbers exacerbates the fact that they are estimates and the analysis often placed on them assumes a degree of accuracy which is simply not present. These spot numbers should be accompanied by a range of probability but they are not.
Also we are seeing quite a lot of back numbers being revised down in economic statistics for growth. This is not solely happening in the US and whilst I am a fan of statistical bodies reviewing their data, the fact that back numbers for growth are being revised down again and again does not enhance the credibility of the process. More and more will start to wonder about this if this trend continues.
As to a final conclusion well the last 3 quarters for US growth go 5%,3.7% and 2.4% so yes we do have a slowdown.
The Japanese Economy
Last week also brought us data which posed some questions for Japanese economic growth. The unemployment rate in Japan rose from 5.2% to 5.3% in the latest figures for May which is concerning when we are supposed to be in a recovery. Industrial production fell also in the same month by 1.5% and one of the factors in this was slower export growth. Just to add to the atmosphere then Japanese consumer prices fell by 1.5% continuing a trend which Japan has been suffering from for some time, disinflation with prices actually falling. This was the 16th month where the annualised figure was negative.
Adding this data to the themes in Japanese economic life of an ageing population, weak domestic consumption falling prices and high level of national debt means that Japan is troubled. It will not have helped as “face” is an important issue in Japan that she is being overtaken in many respects by China. The level of national debt to GDP is very high and way exceeds even Greece, according to the IMF the ratio will hit 250% in 2015. However the IMF has proposed a solution which at best is curious as it proposes a consumption tax. It does not strike me as an inspiring suggestion in an economy already suffering from weak domestic consumption. However the new government of Mr.Kan has put reducing the deficit as a priority.
Just to add to the difficult situation the Yen has recently been strong and is currently at 86.7 versus the US dollar. So the traditional Japanese strength of exporting has to deal with a high exchange rate. It is becoming less of a surprise now why Japanese equity indices are underperforming their US cousins. However their government bonds have no such qualms and the yield on her ten-year maturity is now 1.07%. I know that this market is essentially domestic and therefore one needs to add the disinflation rate to get a real yield but when you look at the relative size of Japans national debt this level of yield looks wrong to me. If you were defining a bubble that is likely to bust you would be hard pressed to find a clearer example. Or of course we have found a group of people whose view on the Japanese and world economy must be at the level where they are buying tinned food,guns and ammunition!
Number crunching and the UK Film Council
There has been a lot of press recently on this subject,particularly considering it is or perhaps I should say was a small organisation. Of course the chattering classes do have a high level of media presence. I saw something in the London Evening Standard which made me think.
Founded in 2000 and disbanded without warning on Monday, the UK Film Council funded UK films to the tune of around £15 million a year. Thanks to them, our film industry has since 2000 doubled its contribution to the economy — £4.5 billion last year, supporting around 100,000 jobs
It occurred to me that this was an extraordinary effort as apparently we had found some captains of industry who could for only £15 million a year cause a £2.25 billion increase per year in the UK film industry. A contribution of a whopping 150 times their claimed funding. Imagine if we put them in charge of UK manufacturing?
Looking at the UK Film Council website I see that it thinks that rather than doubling the UK film industry has increase by 50% since 2000.
The core UK film industry now contributes approximately £4.3 billion per year to the UK economy – up by 50% since 2000, when the UK Film Council was created
So we have lost half of the supposed growth but 75 times is still good. I guess this is why the senior members on the UK Film Council were so well paid. Including pension costs the Chief Executive was being paid £224,414 and for 2008/09 (latest general figures) the senior staff were paid £1.27 million with total staff costs being £5.834 million. Not bad for 75 staff.
Oh and the latest funding levels were more like £30.67 million from the UK taxpayer and £34 million from the National Lottery fund which of course is another form of funding from the UK taxpayer.
Of course the film industry is one where figures are opaque and money disappears everywhere but the claims for the UK Film Council were extraordinary enough for me to take a look. I am no expert on films and the UK Film Councils supposed contribution to them but just to add a further issue it is pure fantasy to suggest that all the growth in the UK film industry is due to them.