As investors look for an end to the recession, the focus is likely to turn from policy to data. No indicator is timelier than claims for unemployment insurance. Claims have edged lower in the past few weeks: the four-week average has dropped from a peak of 659,000 on April 4 to 647,000 in the latest week. When can we be confident about a turning point in claims? Historically, claims peaked anywhere up to two months before the end of recessions. Of course, they are notoriously noisy 's even the usual smoothing with a four-week average can produce false signals.
Moreover, this is an unusual business cycle so the risk of multiple peaks is probably larger than normal. Initial claims are a "flow" variable: they measure the speed of layoffs. Hence, periods of high claims should be associated with rapid job loss. However, the link between claims and payrolls is not symmetric. Specifically, employment levels off at the end of recessions even though claims are still quite high. For example, following the big 1982 recession, jobs stopped falling in the first month after the recession, even though claims were still running at 526,000. For the current period, the consensus is to view a sustained drop below 600,000 as a signal that the end of the recession is near and below 550,000 as a signal that it is over.
In common with developments elsewhere, eurozone business confidence has begun to improve. The composite "flash" PMI* (Purchasing Managers Index) in April rose to 40.5, up from 38.3 in March, marking the first reading above 40 since last October. The improvement was in manufacturing (to 36.7 from 33.9 in March and a low of 33.5 in February). Particularly encouraging was the substantial increase in the new orders balance 's if we consider the gap between this and inventories, there has been an even more substantial improvement. The service sector PMI also showed an improvement (which rose to 39.5 from 37.7 and a low of 35.9 in February). In a similar manner, the German IFO expectations sub index improved to 83.9 in April from 81.6 in March (from a low of 76.9 in December).
However, it is still nearly 12 points below its long-term average of 96.1. While this improvement is welcome and should continue to emerge in the months ahead, there is nonetheless still a long way to go before the PMI data is consistent with economic expansion. The composite PMI is still consistent with eurozone GDP contracting at about a pace of 0.8 percent quarter on quarter. This suggests that the composite PMI needs to improve further to get to the 'growth zone.' Financial market and economic commentators are still digesting this week's startling news on the U.K.'s public finances. The fact that the Chancellor downgraded his 2009 GDP growth forecast to -3.5 percent came as no surprise. However, the projection that the budget deficit would be around 12 percent of GDP both this year and next was literally breathtaking.
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* The PMI is a composite index of five "sub-indicators", which are extracted through surveys to purchasing managers, chosen for their geographic and industry diversification benefits. The five sub-indexes are given a weighting, as follows:
â€¢ Production level (25 percent)
â€¢ New orders (from customers) (30 percent)
â€¢ Supplier deliveries - (are they coming faster or slower?) (15 percent)
â€¢ Inventories (10 percent)
â€¢ Employment level (20 percent)
Last week, the Russian Ministry of Economy increased its estimate for a first quarter GDP decline to -9.5 percent year on year from -7.3 percent previously, and forecast a 8.7-10.0 percent year on year GDP decline in the second quarter of this year. The market consensus forecasts a 10 percent GDP contraction in the second quarter followed by 6.5 percent and 2.3 percent declines in the third and fourth quarters, respectively. The GDP decline should slow down in the second quarter, but signs of a recovery are not expected until at least the third quarter.
The first quarter GDP decline was caused mainly by a plunge in investment, a 20 percent decline in construction, and a sharp decline in private consumption. The latter is the result of rising unemployment (9.5 percent in March from 8.5 percent in February; we expect a 10.5 percent unemployment rate by the end of 2009) and a continued decline (-5.7 percent in March) in real wages, as evidenced by the 4 percent decline in retail sales in March.
*** Written using materials from Bloomberg and Reuters Research