Monday, August 17, 2009

ECRI vs BNP Paribas

Economic Cycle Research Institute (ECRI) released its Weekly Leading Index for U.S. last Friday
August 14, 2009 (Reuters) - A U.S. future economic growth gauge rose in the latest week, as its yearly growth rate surged to a 26-year high, suggesting that recovery will commence at the briskest pace in decades, a research group said on Friday.
The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index rose to a 47-week high of 123.9 in the week to Aug. 7 from a downwardly revised 121.7 the prior week, which was originally reported at 121.8.

Meanwhile, the index's annualized growth rate leapt to a 26-year high of 13.4 percent from last week's five-year high of 10.4 percent, which ECRI
originally reported at 10.5 percent. It was the index's highest yearly growth rate reading since the week to Aug. 26, 1983, when it stood at 13.9 percent.
"With WLI growth surging, the odds are rising that the early stage of this economic recovery will be stronger than any since the early 1980s," said Lakshman Achuthan, Managing Director at ECRI.

Achuthan recently told Reuters that the national recovery would be stronger than many expect, though signs of such strong growth will not be apparent until sometime next year.

"Next year, looking back you'll see that GDP, industrial production, sales, and even non-manufacturing jobs growth -- where 91 percent of Americans work -- began rising as recovery took hold," Achuthan said.
Some charts and data available here. However, one may wish to have more behind the reasoning of consumer recovery, as it is told here.

On the other side of the opinion spectrum we find credit strategy team at BNP Paribas. In their recent "Credit Driver" they are arguing the following:
If this severe deflation dynamic is allowed to continue, sooner rather than later, not just equities but AAA corporates and treasuries will also come under pressure due to rapidly shrinking revenues and tax receipts. Recapitalising the financial system is of the essence here. Investors betting on restocking of inventories to drive growth will be disappointed to know that the underlying dynamics simply do not support that argument.

Firstly, we note from Chart 2, that there has been no building up of inventories in Q2. Secondly, just because inventories have come down by a large dollar amount, it does not imply that restocking has to take place because sales have declined faster than inventories.
Also, restocking will only take place when sales begin to
stabilise, which is yet not apparent and can be seen in the significant fall in retail sales for July, despite the Cash for Clunkers programme. Importantly, the restocking will also be smaller than usual, as final demand from the consumer is likely to be very weak due to rising unemployment, falling wages, rising energy prices and lack of credit availability.
For those who are unconvinced about this argument, it is
all there in the FOMC policy statement, where the Fed states that, “businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales.” What we are really concerned about is how businesses will manage to restock without the availability of credit.
So, you know that you don't know really ... Let's hope that the wealthy pull the rest out of slump!

No comments:

Post a Comment