Coincident Indicators Fall Again

Just as I predicted, the latest release on leading, coincident and lagging indicators included a downward revision of the March number for coincident indicators, as well as the February number. Instead of seeing a 0.2% decline in February and a 0.1%
rise in March, they fell 0.3% in February and was unchanged in March. Now they say the April number was unchanged. It seems clear however, especially with the sharp decline in industrial production that this number too will be revised down and so be negative.

Although usually ignored by the financial medua, the coincident indicators are important because they are used by NBER to determine if and when a recession has started.

I should however caution that the so-called tax rebates might give a temporary and artificial boost to one of the coincident indicators, real disposable income excluding transfer payments. To the extent the so-called rebate is treated as what it really is, a transfer payment, it won't affect these numbers. However, as some of it will be treated as a tax cut, and so boost real disposable income excluding transfer payments, this indicator will be boosted. This of course goes against the intent of this indicator, to measure market and employment based income, and so indirectly the value of production, but it will nevertheless probably be accounted for that way. This mean that this indicator, and by extension the coincident indicator index, will appear stronger than it really is. But those of you who read this blog will be able to see through it.

Norway's Gladstone Gander Economy

Today is May 17th, Norway's national day, so perhaps a review of the Norwegian economy is warranted. I actually did review it 2 years ago on the Der Invest Informant web site. In these two years, not much have changed so what I wrote there still holds so I won't repeat it here and instead recommends you to follow the link and read it the article. The only difference is that the oil price is even higher now than then, and that the Norwegian krona has strengthened even more (at that time a US$ stood at 6 NOK, now it costs only 5 NOK), so the Norwegian budget- and current account surplus is even higher now, particularly in dollar terms. And because of this, the relative wealth of the Norwegians are even greater now than then. Indeed, at current exchange rates, Norway's GDP per capita will likely surpass $100,000-more than twice as high as in the United States and most Western European countries. While this advantage is much lower if you consider the very high cost of living in Norway, it is certainly the case that Norway is richer than any other country in the world except for Luxembourg and maybe also some Arab Gulf state.

Not that Norwegians can actually enjoy it as the government forcibly saves all of the oil revenues in a special oil fund that invests in foreign securities. This policy, as I wrote in the article is basically supported by all parties except the in theory libertarian but in practical politics right-wing populist Progress Party (Fremskrittspartiet (FRP) in Norwegian), who wants to if not halt, then at least reduce this forced savings and use it for dramatic tax cuts combined with increased spending in some areas. A somewhat humorous note was in the latest Progress Party congress, when the party's taxation spokesman Gjermund Hagesæter attacked socialist finance minister Kristin Halvorsen and said she was like Onkel Skrue, the Norwegian name for Uncle Scrooge or Scrooge McDuck, and had brought a figure of that Ddisney character to illustrate this.

After having pointed out that despite the record oil wealth, Norwegans were forced to pay more taxes than ever, he asked the gathering what the similarities between Halvorssen and Scrogge McDuck was and answered this himself by saying

"Ja, for uten at de begge er store i nebbet da. De sitter begge på store pengesekker og de er like gjerrige. Kristin Halvorsen er Norges svar på Onkel Skrue!"

Which in English means: "Well, I mean aside from both having a big beak. They are both sitting on hugh amounts of money and they are both equally greedy. Kristin Halvorsen is Norway's version of Uncle Scrooge!"

Still, while Kristin Halvorsen may be a statist version of Scrooge McDuck, the Disney character that best describes the Norwegian economy is arguably Gladstone Gander.


Gladstone Gander is the cousin to Donald Duck that is a rival for Daisy Duck, but in sharp contrast to Donald has really unbelievable luck. Gladstone Gander never works or save any money, but because of his unbelievable luck he still always have enough money to live comfortably, because whenever he runs out of cash he simply walks out on the street where he finds a lottery ticket which gives him a winning of $100,000 or some other large sum that enables him to live comfortably without working.

Of course, most Norwegians do work and so it is certainly not the case that all of their wealth can be attributed to luck, in the way that all of Gladstone Gander's money is acquired through sheer luck. So Norway is not purely a Gladstone Gander economy, and certain Arab Gulf states have arguably an even stronger Gladstone Gander character. But it is clearly the case that reason why Norway is so much richer than the rest of Western Europe is because they had the luck of having all that oil, which is becoming more and more advantageous for them as oil prices just keeps rising.

Chinese Earthquake Raise Oil Price

The price of oil rose to a new all time high of more than $127 per barrel per day. The reason was apparently the Chinese earthquake. Many people would perhaps have expected the earthquake to, if anything, lower the oil price as it will temporarily lower Chinese economic growth and so cut demad for oil there. But as much of the negative supply shock will occur through problems in coal distribution, which in turn means that the need rises for a substitute in the form of oil.

U.S. Industrial Production Collapse

When I wrote last month about Don Luskin's pathetic recession denial, I mentioned his argument that because industrial production at the time had been reported to rise 0.3% in March, there were no recession, an argument which was really misleading for reasons I mentioned then.

Now that argument appears more pathetic than ever. Not only has that increase been revised down to 0.2%, but industrial production for April was reported to fall by a full 0.7%. As industrial production fell with 0.7% in February too, this means that April industrial production is 1.2% lower than January industrial production, a decline of nearly 5% at an annual rate. The decline is even bigger if you look at manufacturing alone.

I wonder if Luskin will mention industrial production figures in his next column. Somehow I doubt it....

Euro Area Economy Show Resilience

In sharp contrast to Estonia, the euro area economy showed great resilience during the first quarter, with growth accelerating to 0.7%, from 0.4% in the first quarter. Growth was primarily driven by Germany which saw a full 1.5% growth rate. Growth was also fairly strong in Greece and Austria. France saw growth of 0.6%, which if not strong in a absolute sense, is strong by French standards. By contrast, growth weakened considerably in the Iberian peninsula, with perennial laggard Portugal seeing negative growth, and Spain seeing growth slowing to 0.3%, the lowest in a very long time. Holland also saw growth slowing significantly. Of the countries not yet reporting, Finland and Slovenia probably saw high growth, while Ireland and Italy probably saw very little or negative growth.

Note that these growth numbers are expressed in the European way, that is simple quarterly change. Expressed in the American way, quarterly change at an annual rate, these numbers would be 4 (or slightly more than 4 due to the compound growth effect) times higher.

Growth in Germany appears to have been boosted to some extent by one-off factors, such as a mild winter that boosted construction activity, and so we should certainly not expect any more quarters with the same growth rate as this one. Still, there is considerable underlying strength in the German economy as free market reforms have boosted the structural growth rate and as German households and companies have high savings and low debt. The same is essentially true for Finland, Austria and Holland (whose growth rate was probably suppressed temporary factors). Slovenia is at the same time experiencing something of an inflationary boom. On the other hand, countries like France, Italy and Portugal have deep structural weaknesses. And Spain and Ireland are being dragged down by housing busts.

The net result of the relatively strong north Eastern bloc and the structural or cyclical weakness in the rest will probably be weak, but still positive growth.

Estonian Recession Confirmed

Yesterday's GDP number for Estonia confirms the assessment I made a few days ago that the country is in a recession. GDP fell a full 1.9% compared to the previous quarter, or almost 7.5% at an annual rate, something which lowered year over year growth to just 0.4%.

Seasonal Adjustment Time Bomb

In the 3 most recent months, the cumulative seasonally adjusted increase in the U.S. CPI has been just 0.5%. Yet the actual CPI increase, which is to say the non-seasonally adjusted increase, has been a full 1.8%.The Bureau of Labor Statistics has in other words assumed a full 1.3% seasonal increase in prices for the last 3 months. This assumed seasonal increase is 0.3%:points higher than it was last year during February to April.

One can argue whether this seasonal adjustment is right or not. I personally suspect it is too high, meaning that the seasonally adjusted increase for the last few months has been underestimated. However, it should be remembered that seasonal adjustments are a zero sum game on a yearly basis. This means that during the coming 9 months, the reported seasonally adjusted increase should be 1.3% higher than the actual increase. Looking at the data for seasonally adjusted and non-seasonally adjusted increase, you can see that this month (May), the actual and the seasonally adjusted increase will be equal. After that, the seasonally adjusted increase will mostly be either equal or higher than the actual increase, with the biggest difference in favor of the seasonally adjusted measure (When in other words the biggest seasonal price cuts are assumed) being in July and December.

The point here is that while the official inflation numbers have probably been understated by a too great seasonal adjustment, this will not be repeated in the coming months. And as actual inflation remains high that in turn means that there will almost certainly be a lot higher headline inflation numbers in coming months than in the previous months.

Stagflation In U.K., U.S.

During the lastest month, consumer price inflation and producer price inflation both rose significantly in the U.K. During previous months, the U.K. actually had surprisingly low inflation compared to the rest of Europe. Until March, the U.K. at 2.5% actually had the lowest inflation rate of all EU countries except Holland(1.9%). But now the effects of the weaker pound are starting to get felt. And as the effects of currency depreciation generally lag quite significantly, it will likely cause inflation to rise even further from the April number of 3.0%, which is going to force Bank of England chief Mervyn King to write a letter to the Chancellor of the Exchequer Alistair Darling to explain the failure to meet the goal and specify what will be done to push it back below 3%. Most likely that letter will likely be a bunch of nonsense ignoring how it is Bank of England policy that is responsible for it, while predicting that inflation will soon fall again without any real basis for that assertion.

Note that this increase in inflation ocurred even as the U.K. economic growth is rapidly deteriorating, indicating that the U.K. economy is increasingly characterized by stagflation.

Another economy charactericed by stagflation is clearly the U.S., something which was confirmed by today's reports. The import price index rose another 1.8%, and is up by a full 15.4% the latest year. Even the index for non-fuel imports rose 1.0% compared to the previous month and with 5.8% compared to 12 months earlier. Tomorrow's CPI report should show a lot slower increases as the BLS assume large seasonal increases this time of the year. Still, the increase should be comfortably above zero.

Meanwhile even nominal retail sales fell last month and rose just 2.0% compared to 12 months earlier. This implies that real retail sales are falling significantly.

The Not So Brilliant Chinese Leaders

When I last analyzed the Chinese economy, I noted that during the first quarter China was hit by a negative supply shock in the form of severe winter weather. But as the winter weather was highly unlikely to continue during the second quarter, I reckoned China's growth would pick up again during the second quarter. Now China has been hit by another negative supply shock. Not cold and snow, but an earthquake. The main effect of this earth quake is of course mass deaths and suffering, but it will likely also have an effect on the Chinese economy similar to the severe winter weather in the form of lower growth and higher inflation.

At the same time, growth in domestic demand seems to be picking up as retail sales grew at a record 22% rate in nominal terms. The combined effect of the negative supply shock and rising growth in domestic demand is that price inflation will likely stay high. To combat this, Chinese leaders are mainly relying on raising bank reserve requirements.

At the same time, Chinese leaders are noting the conflict between on the one hand reducing demand to reduce inflation and on the other hand boosting consumer demand to reduce dependence on exports. To quote People's Bank of China leader Zhou Xiaochuan:

"On the one hand, we need to boost consumption to adjust the economic growth structure, but on the other hand we also need to prevent excessive demand from fueling inflation."

It seems that Zhou must have failed his international economics class. There is in fact one way of solving this apparent conflict, one way to increase consumer demand without increasing overall demand. Namely, to let your currency rise in value. That will boost consumer purchasing power and so help rebalance the Chinese economy, while not increasing overall demand as it reduces net exports. But after accelerating the rate of appreciation earlier in the year, the yuan appreciation has stalled in recent weeks. Chinese leaders should again accelerate the rate of appreciation (or better yet make a really big one off revaluation, or even better, allow the yuan to float) if they want to decrease the dependence on exports while containing price inflation.

Baltics Head Into Stagflation

The Baltic states for long enjoyed the highest growth rate in the EU and was therefore held up by many free market advocates, including me, as a good example of the positive effects of low tax and low spending policies. However, unlike most others, I also warned already back in 2005 that the Baltic boom had an unsound element in the form of excessive monetary expansion. After I wrote that, these excesses became worse and worse, so my general assessment of the Baltic economies and particularly Latvia became more and more bearish.

In recent month, the state of the Baltic economies has deteriorated quite significantly. First of all, consumer price inflation have gotten worse and worse, with Estonia seeing an inflation rate of 11.4%, Lithuania an inflation rate of 11.7% and Latvia an inflation rate of 17.5%.

And while Claus Vistesen is not yet willing to call the Baltic downturn a recession, I am (at least with regard to Estonia and Latvia). While there are no official confirmation of that yet in the form of quarterly changes in GDP (or for that matter, NBER-style coincident indicator index), there are yearly changes available. And we saw in Latvia
how year over year growth nose dived, from 8.0% to just 3.6%.
A decline in 4.4%: points between two quarters almost certainly imply negative quarterly growth. In Lithuania on the other hand, quarterly growth could be on the plus side, if only slightly, as the decline in year over year growth was just from 8.0% to 6.4%. For Estonia, no preliminary GDP figures are available, but sharp declines in retail sales and industrial production on even year over year terms clearly indicate that Estonia is in a recession.

Given the fixed exchange rate policy, this economic downturn will likely result in a significant downturn in inflation. And given the strong microeconomic fundamentals, the Baltic economies should eventually recover and again see rapid economic growth. But hadn't they copied the ECB's inflationary policies this boom-bust cycle wouldn't have happened and would have passed faster than it now will.

UPDATE:As Claus Vistesen points out and as I also see in the latest Eurostat release on EU GDP, Lithuania did in fact see a falling quarterly GDP in Q1 2008.