. Synchronization of the business cycle
[ Ссылка ]. . 7 19 2020 2 55 09 PM . . . The pandemic has served to synchronize business cycles. In the first instance, it was a body blow to economies. After the first shock, it was a question of containing the outbreaks, ensuring the financial markets and bank functions have normalized to facility the economic recovery. It appears March and April were the worst and that subsequently, economic activity has gotten less bad and some early signs that an expansion may be taking hold. It is early and uneven, but it is real. . Even in the US, which on the whole, appears to have done an unreasonably poor job of containing the virus, data, including the first set of regional Fed manufacturing surveys, are being reported above the median economic forecasts. This is evident in the data surprise models. Ultra high frequency economic activity metrics, like railroad traffic, is trending higher on a week over week basis. Indeed, manufacturing appears to be gaining momentum as auto plants re opened. In June, auto output soared by more than 100% month over month, additional gains are expected throughout the quarter. Excluding autos, manufacturing output rose by nearly 4% in June. . More states are limiting, and in some cases, reversing the re openings. In terms of percentage of the population and economic activity, these states appear to account for a substantial fraction. After all, California, Texas, and Florida are among them. Nevertheless, day to day measures of consumer confidence have not been undermined, so far. It appears that what is happening is that the parts of the economy that are opening up are more than compensating for those experiencing new closures. Also, the issue is about the pace of the economic activity, not so much the direction. . The better than expected data have spurred economists to revise up Q2 GDP forecasts. The first estimate is due at the end of the month. The Atlanta and St. Loius Fed GDP trackers see a contraction of around 33.5% 35.5%. At 14.3%, the NY Fed s tracker sees less than half the decline, and its models suggest a 13.2% expansion in Q3, up 3.1 percentage points in the past week. . In a rather light week ahead in terms of economic data, the preliminary July PMIs stand out. The US report is likely to underscore the rebounding manufacturing sector. The manufacturing PMI finished H1 at 49.8 and likely moved back into expansion mode in July. It stood at 50.4 last July. The lagging service sector means that that composite likely remained below 50. . The US composite was 47.9 in June, and the eurozone was at 48.5. Recent sentiment surveys showed a clear preference of asset managers to be long the euro and overweight European equities. Flow models suggest the euro is the most bought currency. It partly seems predicated on the idea that Europe will outperform the US. . Unlike the US, France, Italy, and the UK, the German service sector is leading in recovery rather than manufacturing. Germany service PMI could reach 50 in July from 47.3 , while the manufacturing sector may struggle is projected to reach 47 from 45.2 . France is somewhat less reliant on goods exports than Germany, and its economic recovery has been more pronounced. In June, the PMI s were already above 50. The manufacturing PMI was at 52.3, and the service PMI was at 50.7. The result was a 51.7 composite, which finished 2019 at 52.0. . It is not just that the German recovery is trailing France, but the rebound might be faster in the periphery, as well. June was the second month that Italy s composite was above Germany s 47.6 vs. 47.0, respectively . They both bottomed in April 17.4 and 10.9, respectively . Spain s composite moved above Germany s in June as well. It rose from 29.2 in May to 49.7 in June. The UK s June manufacturing PMI edged above 50, while 47.1 service PMI kept the composite below 50 47.7 . . Japan remains a laggard, though it is for different reasons than Germany. Japan s exports as a percentage of GDP are closer to the US in the mid teens than Germany and others in Northern Europe than can be 2 3x larger. Japan will start the week with its June trade report. Through May, it recorded a JPY1.97 trillion trade deficit. It was about JPY1.49 trillion in the same year ago period. Japan s current account surplus is driven by income from past investments. This is interest and dividends on foreign portfolio investment. It is royalties, licensing fees, and profits from overseas. . Just as there does not appear to be a good time to build the tallest building in the world, as it seems to often mark the high in commercial real estate cycle, so too is that simply no good time to hike the sales tax in Japan. The economy contracted in the last three months of 2019 and appeared headed for a contraction in Q1 2020 even before Covid 19 infected the first person in Japan. It does not report Q2 GDP until mid August. E...

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