Economy in Brief: June 2023

I'm reading stories today about how Europe is now in recession. There was a revision to GDP growth for the European Monetary Union that puts first quarter growth in negative territory at -0.4% (annualized Q/Q) matching it with a -0.4% (annualized Q/Q) change in the fourth quarter. This magically gives us two quarters in a row of negative GDP growth – and… here we go again.

Is 1+1=2 the ‘technical definition’ of arithmetic? I have long railed against using this ‘rule of thumb’ as an unimpeachable definition of recession. I am completely opposed to anyone using the expression ‘two consecutive quarters of negative GDP growth is a technical definition of recession.’ When was the last time you ever thought of 1 + 1 equaling 2 being something that was technical? There was nothing technical about this. It is, in fact, what we economists call a ‘rule of thumb,’ and that denigrates the concept to something that more accurately describes what it is. It's an exaggeration or a simplification of an underlying process that is much more complicated than the rule that we are applying to it. In this case, two consecutive quarters of negative GDP growth is a gross simplification of what are rather complex underlying economic processes. In the U.S., the NBER uses 3-concepts to vet a period as recession: (1) Is the period of economic disruptions long enough? (2) Is the disruption deep enough to be termed ‘recession?’ (3) Is the disruption broad enough across the bulk of the economy? One plus one equals two glosses over most of that.

Not long, not severe, a breadth of discomfort…not pain More to the point, this is a two-quarter decline in GDP that's less than 1% at an annual rate - and that's true even when the two declines are combined! I thought that we put this nonsense behind us in 2022 when everyone failed to call two key back-to-back declines in quarterly U.S. GDP a recession. U.S. GDP in the first quarter of 2022 declined by 1.6% at an annual rate; it declined in the second quarter at 0.6% at an annual rate. These are combined annual rate declines much larger than what we're seeing in the European Monetary Union. And yet we denied calling that a U.S. recession. One of the reasons for this was because the rest of the economy was performing quite well. The labor market continued to perform extremely well and so it was quite clear to everybody that this ‘rule of thumb’ had failed. In the European Monetary Union, the unemployment rate continues to drop. The economy has been under some stress. But I'm still quite against using this two-consecutive-quarter of GDP decline rule to call a recession now.

The latest UK housing market data from the Royal Institute of Chartered Surveyors (RICS) residential market survey and from the latest Halifax House Price Index revealed surprising signs of improvement.

The key messages from these reports were as follows-

• The RICS measure for new buyer enquiries in May climbed to -18%, a significant improvement compared to the previous reading of -34% in April. However, despite a noteworthy turnaround in buyer interest over the past 12 months, the figure still suggests a relatively subdued trend in buyer demand.

• Alongside this, the agreed sales balance rose to -7% in May, also much less negative from figures of -29% and -18% recorded in March and April respectively.

• The national house price balance additional remained in negative territory but still rose to -30% in May, up from –38% in April. This was firmer than expected as the consensus forecast was centred on a net balance of -38%.

• This news chimed with yesterday’s survey of house prices from the Halifax building society. The headline house price index, for example, showed no growth in May, following a decline of 0.4% in April.

• Still, the weaker house price trend in recent months meant that UK house prices experienced their first year-on-year contraction since 2012 with a -1.0% fall in the annual rate of growth in May.

OECD leading indicators show mostly weakness but mixed performance among the top regions. The level of economic performance grades as consistently weak or very weak while various measures of momentum are mixed.

Recent momentum Month-to-month in May the OECD 7, the European Big 4 and the U.S. show essentially unchanged normalized leading indicators while Japan ticks up by 0.1% as does the index for the Asian Major 5 (China, India, Indonesia, Japan, and South Korea). Over three months, the OECD-7 index falls by 0.1% and the U.S. index falls by 0.6%. But rising by 0.6% is the European Big 4 and the OECD Japan; the Asian Major-5 index is rising by 0.9%. Over six months, the OECD-7 index has been flat. The U.S. index is down by 0.5%, Japan's index is up by 0.2% while the Asian Major-5 index is up by 0.7% and Europe's Big-4 index is up by 0.9%. The broader 12-month change indexes show declines for all the metrics except for Japan; it is flat over 12 months.

Normalized index standings are weak These normalized indexes all have standings that are below their midpoints (below the 50-percentile mark). Japan comes the closest to being near its neutral mark with a 48.3% standing. After that, the Major 5 in Asia have a 28.4 percentile standing, but then the U.S. reading has a 14.7 percentile standing, the OECD 7 has a 12-percentile standing and Europe's Big 4 have an 11.6 percentile standing. All the major groups show weakness; Japan, viewed in isolation, is closer to a neutral reading and it is the only comparison like that.

Six-month changes The OECD expresses the preference to look at its indicators over six months. In the second panel of the table, we see changes in the 6-month averages that show declines in May for all these groups except for the Europe Big-4 measure that is up by 0.1% and for China that is up by 0.6%. A month ago, all the readings were negative except for China with a 0.4% reading. Looking at point-to-point 6-month changes on intervals of 6-months, we see many more negative readings although the recent 6-months show an increase in Europe’s Big 4 (of 0.9%) and a gain in Japan. There are 6-month declines in the U.S. and in China and with the OECD-7 measure flat. But 6-months ago the 6-month point-to-point changes show all negative readings and for 12-months ago the six-month changes are all negative except for Japan (at 0.1). Mixed 6-month results are a new phenomenon.

The bottom panel of the table looks at the amplitude adjusted readings in level format. In terms of levels, only Japan has a reading above 100 in May, indicating that it is above its adjusted trend. China has a reading in the table above 100 and its colored red because the underlying data are below 100 but round up to 100. What you see in this panel of the chart is a persistence of indexes languishing below 100 that signal performance is below trend values. On the far right, we have queue standings for the levels and again all of them are below the 50th percentile mark. Japan has the strongest reading at a 48th percentile standing along with Germany; China logs a 44.5 percentile standing. All the rest are more substantially below the 50% mark indicating weakness and below trend growth.