April 11, 2016

The global economy is in the midst of a mild cyclical upturn after several quarters of slumping growth, falling profits, and credit stress. The downturn was part of the aftermath of the fading China-driven surge in emerging markets, the nearly two-year plunge in oil prices, and surge in the U.S. dollar. The extreme market volatility early this year was triggered by the climax of those trends. With the dollar off its peak and oil prices up from the lows, markets have rebounded and the manufacturing sector has found a bottom.

That a rebound is underway has received real confirmation in economic data. For the United States, it was another in a long line of stellar job reports as well as a clear rebound in manufacturing surveys. Consumer confidence returned as market volatility evaporated. Housing activity is solid as rising home prices add to wealth. The economy in China has clearly stopped weakening after 18 months of gradual stimulus and monetary ease take effect. Even in Europe with terror attacks and immigration problems, the economy is picking up.

The long surge in the U.S. dollar is redistributing robust U.S. growth to the rest of the world. Stability in China, a moderate rebound in commodity prices, and easing producer-price deflation has put a trough in emergingmarket currencies and stopped the deterioration; PMIs are rising accordingly. Japan is missing most of the upturn; remember, though, small, positive or even flat growth for a declining population raises output per capita.


After months of weakening or contraction territory, China’s manufacturing surveys (PMIs, or purchasing manager indices) all bounced higher in March. The official PMI rose to a nine-month high of 50.2, while the Caixin PMI leapt 1.7 points to 49.7. The services PMI also picked up over a point to 53.8. Report details were even stronger with new orders solidly higher. Price pressures are easing, a real positive after four plus years of deflation.

One measure of consumer sentiment hit nearly a two-year high. House prices are still rising across the country, housing starts are up and home sales are growing. Gaming revenues and hotel occupancy in Macau are improving. Fixed investment has picked up, especially as the government expands infrastructure spending.

Worries about a large currency devaluation are dissipating both within and outside of China. Anbang, the Chinese insurer, withdrew its $14 billion bid for Starwood hotels. Foreign purchases are one way to export currency and the offer retraction could be viewed as greater confidence in local currency.

Rather than a growth rebound, these changes are more a cessation of the two-year deterioration and a waystation to lower but sustainable growth. The structural issues of too much debt and excess capacity that will hinder long-run growth are only slowly being addressed: debt is still rising faster than output and excess capacity is still producing. As an example, another steel company failed to make a bond payment and Standard & Poor’s cut its outlook on China’s credit rating to negative from neutral. Still, the cyclical progress described above is very positive.


Despite the recent terror attacks and immigration problems, the greater European economy is enjoying the cyclical upturn. March PMIs bounced more than expected, bringing the composite Eurozone PMI up to 53.7, consistent with almost 2% growth. The German PMI was flat at a robust level, while the French composite vaulted 1.8 points to expansion. This implies surveys are robust across the rest of the currency area. Economic sentiment did retreat some, but from elevated levels. Retail sales stay relatively healthy as household spending is leading the recovery. Unemployment fell to 10.3% in February, and while still very high, that’s the lowest since 2011. Loan demand is rising, albeit slowly, lending standards are easing and the central bank is offering loans to banks that relend to the private sector at incredibly easy terms.


The March payroll report added another month of 200,000 plus job gains. The headline was up 215,000 with only minor revisions. First-quarter average job growth was a robust 209,000. The household survey, issued at the same time as the payroll report, showed the labor force rebounding as formerly discouraged workers reenter the work force. The rate of labor force participation and the employment-to-population ratio have trended higher from lows last fall, each up a tenth, to 63.0% and 59.9%, respectively, the former a two-year high. The closely-watched unemployment rate did tick up a tenth, to 5.0% as did the broadest measure of unemployment to 9.9%, which includes discouraged workers and people working parttime for economic reasons. The nearly 400,000 jump in the labor force supports Fed Chair Yellen’s hypothesis that slack definitely remains in the labor market.

Wage growth could come under pressure as workers with fewer or outdated skills reenter the labor force. Hourly wages grew 0.3% over the prior month after falling slightly in February, but are still up just 2.4% over the prior year on a smoothed basis. Hours worked were steady at 34.4, but the lowest level in about two years. Aggregate hours worked grew at a 1.8% seasonally adjusted annual pace.

Job gains were mostly in lower-wage sectors: retail, leisure, and hospitality. Construction and government added 37,000 and 20,000 jobs, respectively. Job losses were mostly concentrated in sectors suffering from the long plunge in oil and commodity prices: manufacturing shed workers for the second month, off 29,000; mining lost 12,000 jobs; and 6,000 fewer temp jobs (often in light manufacturing). The rebound in the national manufacturing index to 51.8 to expansion and the bounce in new orders to 58.3 suggest that manufacturing employment may soon pick up.