Are the world economy’s lights flashing red or green? Photo by David Arthur/Getty Images.
Here is a memo for the G-20: The global economy is actually growing.
If you’ve followed news flow lately, you’ve probably at least seen mention of Japan’s renewed recession, the eurozone’s slow recovery and China’s slower economic growth. Against that backdrop, you might think the G-20’s recent Declaration of Sort of Stimulative Action Loosely Valued at Something Like $2 Trillion (DSSALVSL$2T, and yes, we just made that up) is warranted. British Prime Minister David Cameron followed up the DSSALVSL$2T with an op-ed in The Guardian claiming the global economy’s “red warning lights” were flashing. Australian Prime Minister Tony Abbott sighed a sigh of relief, claiming the G20’s DSSALVSL$2T will make the entire world “better off.” Cue the Lionel Richie.
But when you strip away the spin, you find there is no need for Bob Geldof to put on a “Live-Aid 30: Save the World Economy” benefit.[i] The much-maligned eurozone’s Flash November PMI registered 51.4, below consensus estimates of a 52.3 reading and less growthy than October’s 52.1, but growthy nonetheless. (Any PMI reading above 50 means more than half of firms reported growth.) In the UK, retail sales surged 0.8% m/m in October (+4.3% y/y), rebounding from a -0.3% dip in September and posting the eight month of growth in the last 10. In China, the HSBC/Markit PMI registered 50.0—down from 50.4 in October and at the dividing line. However, fretting the by-now-standard hard-landing fear headline, consider: New orders and new export orders both grew, with overall new orders accelerating. Also consider: The gauge has spent most of the last year flipping between slight growth and slight contraction, yet Chinese GDP has grown at a better than 7% clip throughout. Why? This gauge doesn’t tally the degree of growth, just the breadth—and it doesn’t even tally the large, state-run firms so dominant in China’s economy.
Now, if you are a G-20 figurehead, you might say: “Hey! That’s all backward looking stuff. Cameron and the other 19 of us launched DSSALVSL$2T because of flashing warning signs of a future slowdown!” To which we’d say, “You’re wrong, Chinese new orders are a forward-looking gauge.” But also, The Conference Board’s US Leading Economic Index—the first of their LEI series out for that month—jumped higher in October, rising 0.9%. Only one component (stock prices) fell. And even that gets an asterisk. The Conference Board’s tally of equity markets uses the average daily closing level of the S&P 500 Price Index during the month. That fell in October. But when you don’t average it and instead look at the start and end of the period, stocks rose. It’s all really a function of the early-to-mid-month weakness giving way to a sharp rally at the end. In addition, this is a fairly small contributor[ii] to the index.
This is the available evidence against which we consider DSSALVSL$2T. And in our view, it’s totally unnecessary. The world doesn’t need a Band-Aid! But also! It’s unlikely to amount to anything. The G-20’s moves are vague, unlikely to pass in full, gradual and, likely, ineffectual. There are scant few details to discuss, much less a way to analyze their mathematics and see how they come up with that something like $2 trillion figure. But hey, so long as the bulk of the world is slanted toward growth—and we’d suggest that is the case today, based on available data—stimulus from the G-20 needn’t be very specific. Or real.
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[ii] And one you should discount if your interest is forecasting markets. If it is the economy, you should mind market moves, but you can’t use past stock wiggles to forecast future jiggles.