The world has been zig-zagging between optimism (risk off) and pessimism (risk on) in the economic sphere for the last few years.
Optimisim has usually been fueled by announcements and plans (e.g. hopes and promises) — announcements by the ECB to buy bonds, the Fed to QE indefinitely, plans for a European banking union afoot.
Then pessimism arrives, driven by hard data and real actions. The data indicates weakness in the global economy — renewed recession in Europe, a hard landing in China, stalling in the U.S. — or actions by crowds or governments that say “we cannot go along with the harsh austerity plans demanded in order for the bail/out reform plans to go forward,” or by bond traders that say “we no longer have faith that the promises and plans will deliver real fiscal gains.”
One would expect hard data and real actions to trump pie-in-the-sky announcements and plans. But for the last three months (a summer fling?) optimism has been ascendant. The ECB and Germany’s plan for a European banking union were going to save the Eurozone. China’s government was going to intervene to stimulate the economy. The Fed was going to pull out all the stops to promote growth. Bond yields in Italy and Spain dropped. What has happened?
So far, the economic data from China continues to indicate a sharp slowdown. The 7.6% official growth figure for 2012 Q2 seems an overstatement, given weaker data on exports, electricity use, and rail volumes. Even much of that seems going into inventory accumulation of raw materials and manufactures, portending still slower growth ahead. Europe’s weak countries — Spain, Greece, Portugal, have all had to revise their economic estimates DOWNWARD, as austerity crushes growth. Because of the lack of growth, these countries are now contemplating even fiercer cutbacks in government employment and services and higher taxes, to the point that popular protest has erupted again across the Mediterranean.
In the U.S., signs of growth seem to have vanished in the release of new data this morning. The GDP gain in Q2 was revised downward from 1.7% to 1.3%, putting it below the “stall speed” of 1.5%. US GDP growth has now declined from 4% in 2011 Q4 to 2% in 2012 Q1 to 1.3$ in 2012 Q2. If that trend continues for one more quarter, the U.S. will be in a virtual recession by Q3.
Most startling, durable goods orders fell by 13% in the quarter, the worst drop in over three years. Much of this was in defense and airlines, but even excluding these sectors, order growth was only 1.1%, and shipments of non-defense non-air capital goods actually declined the last two months. Since manufacturing had been the driver of US growth, and farming has been hard hit by the drought, one cannot expect Q3 GDP to look very good — although a revival in housing may help.
So now growth in both China and the US is lower than expected (and the US is heading for a fiscal cliff that will squash growth), while European countries on rescue watch are failing to hit their rescue targets and hitting renewed political headwinds.
It looks like risk is ON again….