The U.S. economy turning the corner?

The U.S. economy has contracted for the second quarter in a row, again more than an annualised 6% in the first quarter of 2009. But, will the economy start to recover?

Alan Rappeport of the Financial Times reported as follows:

The US economy continued to contract in the first quarter of this year as business investment collapsed in the face of eroding global demand.

Preliminary commerce department figures showed on Wednesday that US gross domestic product declined by an annualised rate of 6.1 per cent in the first quarter, after declining by 6.3 per cent during the fourth quarter of last year. The decline was worse than the 4.7 per cent that economists expected and marks a slight improvement from the fourth-quarter contraction, which was the sharpest since 1982.

The US economy has not contracted for three consecutive quarters since the first quarter of 1975 and the last six months have been the weakest such period in 51 years.

The economic slowdown was blunted by an uptick in consumer spending and a rebalancing of the trade gap due to a steep decline in imports. In the first quarter imports plunged by 34.1 per cent while exports fell by 30 per cent, as trade dried up. It was the biggest quarterly decline in exports since 1969.

Business investment was the biggest drag on economic growth. The 51.8 per cent decline drained 8.83 percentage points from GDP, as the recession spread from consumers to companies. Private businesses decreased inventories by $103.7bn in the first quarter compared with a decline of $25.8bn in the fourth quarter. That sapped 2.79 per cent from overall GDP, as companies worked to clear stocks.

“What started out as a housing-led downturn that would hit consumption hardest is now clearly having a much bigger impact on businesses,” said Paul Ashworth, US economist at Capital Economics.

Economists took hope that the US consumer proved resilient, with spending rising by 2.2 per cent compared with a decline of 4.3 per cent during the last quarter. Spending was focused on durable goods and lifted overall output by 1.5 percentage points.

Government spending, which helped to buoy GDP in the last quarter, eased so far this year. Federal consumption was off by 4 per cent in the first quarter compared with a 7 per cent increase the quarter before, as defence spending dipped.

Although the US economy has been mired in the worst recession since the Great Depression and unemployment, at 8.5 per cent, sits at a 25-year high, better-than-expected data and a stock market rally had recently offered some glimmers of hope. And though most figures continue to show declines, there had been signs of stabilisation in consumer confidence, home sales and construction.

Economists predict that the impact of the $787bn government stimulus package will not be felt until the second half of this year and that the economy could contract further in the second quarter before flattening.

The US government’s latest 10-year budget outline projected that the economy would contract by 1.2 per cent in 2009 before rebounding to 3.2 per cent growth in 2010. However, many economists suggest those forecasts are overly optimistic.

US consumers regaining confidence?

Rex Nutting of MarketWatch reported on the latest consumer confidence data coming out of the USA:

U.S. consumers are considerably less gloomy about the economy. The consumer confidence index jumped to a reading of 39.2 in April from 26.9 in March, the Conference Board reported.
The 12.3-point month-to-month gain was the fourth-largest ever in the 32-year history of the survey. The index bottomed at a record low 25.3 in February. March's revised reading of 26.9 was the second-lowest on record.

Economists had been expecting the index to rise about five points, to 30.5, for April, according to a survey conducted by MarketWatch. "The survey results do not alter the dismal way in which consumers continue to view the economy, but they fit the 'green shoots' idea currently driving market prices," said Tony Crescenzi, chief bond market strategist for Miller Tabak & Co.

Consumers were a little happier about the present situation than they were in March, but the big improvement came in the expectations index, which surged to 49.5 in April from 30.2 in March -- the biggest increase since the fall of Baghdad in the spring of 2003.

"The sharp increase in the expectations index suggests that consumers believe the economy is nearing a bottom," said Lynn Franco, director of consumer research for the Conference Board. "However, this index still remains below levels associated with strong economic growth."

The present situation index improved to 23.7 in April from 21.9 in March, still a very weak reading. The percentage of consumers saying business conditions are "bad" fell to 45.7% from 51%, while the proportion saying conditions are "good" increased to 7.6% from 6.9%.

"The closely watched question on views of the current labor market showed only marginal improvement," wrote David Greenlaw and Ted Wieseman, economists for Morgan Stanley.

Indeed, survey respondents saying jobs are hard to get fell modestly, to 47.9% from 48.8%, while the percentage saying jobs are easy to get also fell, dropping to 4.5% from 4.7%, and pointing to further job losses.

The short-term outlook brightened, but consumers remained pessimistic overall. Those expecting conditions to improve in the next six months rose to 15.6% from 9.6%, while the percentage saying conditions will worsen further declined to 25.3% from 37.8%.

Who else to blame?

By now many industries, organisations and individuals have been blamed for being asleep at the wheel while the financial crisis was taking shape. However, one group in particuliar, namely journalists, have escape critism by large, perhaps for obvious reasons.

Recently, Lionel Barber, editor of Financial Times, set the record straight in a speech he gave at Yale University. An abrigded version of his speech appeared on FT.com on April 21, 2009:

These are the best of times and the worst of times to be a financial journalist. The best, because we have a once-in-a-lifetime opportunity to report and analyse the most serious financial crisis since the Great Crash of 1929. The worst, because the newspaper and television industries are suffering, not only from the shock of a recession but also from the structural shock of the internet revolution.

Now comes a third shock. The financial media are accused of mis­sing the global financial crisis. Asleep at the wheel. Head in the clouds. No cliché has been left unturned as reporters, commentators – yes, even editors – have been castigated for failing to warn an unsuspecting public of impending disaster.

First, by way of mitigation, journalists were not the only ones to fall down on the job. Political leaders were happy to break open the champagne at the credit party; many lingered long after the fizz had gone. Regulators in the US, UK and continental Europe all failed to identify and contain the risks building within the system. Many economists, too, fell short. Only a few – such as nouriel Roubini, now celebrated as the thinking man’s prophet of doom – identified pieces of the puzzle, even if they failed to piece them together.

Why did financial journalists not pay more attention to these warnings? First, the financial crisis started as a highly technical story that took months to go mainstream. Its origins lie in the credit markets, coverage of which in most news organisations counted as a backwater. Most reporters working in this so-called “shadow banking system” found it hard to interest their superiors who controlled space and who were more interested in broadcasting the “good news” story of rising property prices and economic growth.

A second related problem with the credit derivatives story was that it took place in an over-the-counter market with little disclosure and very little day-to-day news. Inevitably, the temptation was – and still is – to run with the stories that are much less opaque such as public company earnings. Yet the big innovations and the big money came in the credit markets.

The second criticism is that the media were too interested in building up a good news story. The comedian Jon Stewart’s on-air demolition of Jim Cramer shows there is a case to answer. Mr Stewart went so far as to suggest that CNBC, which hosts Mr Cramer’s Mad Money show, overlooked market shenanigans as it was too close to its core community: Wall Street traders and investment bankers.

Journalists routinely face tensions between relying on their sources and burning them with critical coverage. The incentive to “go along” to “get along” is always present, in competition with a journalist’s instinct to speak truth to power.

In the final resort, there can be little debate that the financial media could have done a better job. In this spirit of self-criticism, I identify four weaknesses in the coverage.

First, financial journalists failed to grasp the significance of the failure to regulate over-the-counter derivatives that formed the bulk of counterparty risk in the explosion of credit following the dotcom bubble. Alan Greenspan was opposed to such regulation, but how many commentators took the former Fed chairman to task and warned of the risks? For the most part, journalists were too enamoured with the prevailing tide of deregulation.

Second, journalists, with a few notable exceptions, failed to understand the risks posed by the implicit state guarantees enjoyed by Fannie Mae and Freddie Mac, the mortgage finance giants. Of course, it was hard for journalists to attack the ideal of broader home ownership in America, but that is no excuse.

Third, journalists failed to grasp the significance of the growth in off-balance sheet financing by the banks, and the overall concept of leverage. How many news organisations reported on the crucial Securities and Exchange Commission decision in 2004 to loosen its regulations on leverage? The explosive growth of structured investment vehicles at the height of the credit boom was also woefully under-reported.

Fourth, financial journalists were too slow to grasp that a crash in the banking system would have a profoundly damaging impact on the real economy. The same applies to regulators and economists. For too long, too many experts treated the financial sector and the wider economy as parallel universes. This was fundamentally wrong.

Many of the most important developments of the past decade – the rise of radical Islamic terrorism, the opening of the Chinese economy as well as two credit bubbles – have largely been unanticipated or failed to attract the attention they deserved. Journalists, in this respect, have a crucial role to play. Flawed they may be, but they still have the capacity to be the canaries in the mine.

"Invest in South Africa" says U.S. fund manager after ANC's decisive win at the polls

Polya Lesova, a reporter for MarketWatch, published the following story:

With the African National Congress poised for a strong victory in South Africa's general election this week, now is the time for investors to get exposure to attractive stocks in the African continent's biggest economy, says a fund manager at T. Rowe Price. "We think stocks are cheap. It's a good environment for stock picking," said Joseph Rohm, manager of the T. Rowe Price Africa & Middle East Fund, which had $151 million in assets as of late March.
"We'd look to accumulate some of the better quality companies [in South Africa] on the back of the election," Rohm said in a phone interview Friday.

Rich in natural resources, South Africa is a major exporter of gold, diamonds, metals and minerals. Its economy has been hurt recently by a drop in manufacturing and falling commodity prices.

South African equities have underperformed other emerging markets this year. Johannesburg's benchmark All Share stock index is down 4% year-to-date, while the MSCI Emerging Markets index is up 13%.

"With the ANC, you get a continuation of existing policy and business friendliness," Rohm said. "I don't think there's a shift to the left."

The ANC's Zuma, a key leader in the fight against apartheid, is seen as charismatic, but has been plagued by corruption allegations. Also, some investors are wary of Zuma because he is supported by the Communist Party and trade unions.

"Does he [Zuma] have to reward all the voters that put him into power?" said Nigel Rendell, senior emerging markets analyst at RBC Capital Markets. "His support is from low-income people. We need to watch that fairly closely, that he doesn't put undue pressure on [Finance Minister Trevor] Manuel."

Analysts stressed the importance of keeping the widely respected Manuel in charge of the finance ministry.

"The number one concern is economic policy and that means does he [Zuma] keep Trevor Manuel at the finance ministry," Rendell said. "He has to. He really has no choice. He is wise enough to know that."

Rohm agreed: "What will be important is the reappointment of Trevor Manuel. We'd like to see a continuation of the strict fiscal policies that we've had. He's done a fantastic job over the last two terms."

Among the risks facing South Africa are the twin deficits the country is now running as well as rising unemployment, Rohm said.

Still, Rohm believes that now is a good time to buy attractive South African stocks.

Massive losses and massive problems...

In its latest Global Financial Stability Report the IMF is expecting financial institutions to lose about $4 trillion ($4,000bn) in the wake of a deteriorating global economy.

Sarah O'Connor of the Financial Times, published the following report:

"The deteriorating global economy means financial institutions now face total losses of $4,100bn on loans and other assets, the International Monetary Fund said on Tuesday, urging governments to take “bolder steps” to shore up institutions – including nationalising them where necessary.

The IMF said that many loans sitting on institutions’ balance sheets were eroding in value, not just the toxic sub-prime securities which first triggered the crisis.

The IMF estimated that total writedowns on US assets would reach $2,700bn, up from the $2,100bn estimate it made in January and almost double what it forecast in October last year. Including loans originated in Japan and Europe, the writedowns would hit $4,100bn, it added.
Banks would bear about two-thirds of the losses, it said, with insurance companies, pension funds, hedge funds and others taking the rest.

The current inability to attract private money suggests the crisis has deepened to the point where governments need to take bolder steps and not shrink from capital injections in the form of common shares even if it means taking majority, or even complete, control of institutions,” it said.

The report is likely further to unnerve investors, even though the writedown estimates are lower than those of some private economists. US banks have so far taken about half of the writedowns they face, while European banks – particularly vulnerable because of their exposure to emerging European markets – have only taken one-fifth. But if banks took all the writedowns they face immediately, the IMF calculates it would wipe out their common equity altogether.

That highlights the urgent need to inject more capital into many banks and other institutions. To restore their balance sheets to the state they were in before the crisis – defined by the IMF as a tangible common equity to tangible asset ratio of 4 per cent – US banks need $275bn in capital injections, euro area banks need $375bn and UK banks $125bn.

But the IMF expressed concern that taxpayers were becoming weary of supporting the financial sector. “There is a real risk that governments will be reluctant to allocate enough resources to solve the problem,” the report said.

One possible step would be for governments to convert their preferred shares in banks into common equity, the IMF suggested. This is something that the US government is considering, a senior official has told the Financial Times, though some have criticised such measures as “nationalisation by the back door.”

Even if governments do take bold action to shore up the system, the credit crisis will be “deep and long-lasting”, the IMF warned. It said that deleveraging and economic contraction would cause credit growth in the US, the UK and the eurozone to contract and even turn negative in the near future, and only recover after a number of years.

The IMF was also gloomy about the prospects for emerging markets as foreign investors and banks withdraw funds. It estimated the refinancing needs of emerging markets are around $1,800bn, while net private capital will flow out of such economies this year.

Reshaping global financial regulation was another major topic in the IMF report. It suggested creating two tiers of regulatory oversight: one to gather information, and a smaller one for systemically important institutions with “intensified” regulation. It also mooted the idea of levying an extra capital surcharge as a way to deter companies from becoming “too-connected-to-fail” in the first place.