7 September 2009

Weekly Macro Comment

Han de Jong, Chief Economist

Mind the base effect

• Global rebound manufacturing continues

• US payrolls not fantastic, but improving
• No early exit from stimulus policies, but perhaps still earlier than many expect

The global manufacturing rebound is progressing well. This South Korea: Industrial production
time a year ago, economic troubles intensified sharply and % yoy
production fell off a cliff between September and February.
20
With things now improving, the year-on-year comparisons for
many economic indicators will become very easy in the months 10
ahead. This will mean that we are going to see some
0
amazingly strong numbers on a yoy-basis, particularly as far as
industrial production in Asia is concerned, but elsewhere too. -10
To some extent, the yoy numbers will (positively) exaggerate
what is actually happening. It is probably better to watch the -20
trend on a month-to-month basis. That is still going to be good
-30
in my view.
2003 2004 2005 2006 2007 2008 2009

Last week’s economic data was generally positive, but some
soft areas remain. Policymakers are, predictably, trying to
stress that their stimulus measures are not going to make an
early exit and that they have everything under control. We will
see.
High industrial confidence
As we have been more optimistic than the consensus about
economic prospects on a 12-month horizon, we were pleased
to see that the August US ISM for the manufacturing sector
was much stronger than expected. The index rose from 48.9 to
52.9, the first reading above 50 since January 2008. In fact,
you need to go back to early 2006 to find the index clearly
higher than the August reading. We expect the index to rise
further in the months ahead and we expect real economic data
Source: Bloomberg
Further signs of industrial confidence in Asia came from
Singapore where the PMI rose strongly: 54.4 in August from
51.5 in July. Apart from a single fluke number in 2006, the
August reading was the highest since 2004. The PMIs in the
eurozone also showed strength in August, but remained below
50. The manufacturing PMI for the eurozone rose to 48.2 in
August, from 47.9; the services PMI rose from 49.5 to 49.9.
Singapore: PMI
index
58
56

in the US and other western economies to follow. The non- 54

manufacturing ISM also outperformed expectations, rising from 52
46.4 in July to 48.4 in August. It is clear that manufacturing is 50
leading the recovery. Another sign to this effect can be found in
48
last week’s numbers on Korean industrial production. In July,
46
production was 0.7% higher than in July last year, the first
positive yoy-reading since September 2008. This is meaningful 44
as it shows real strength. Because of base effects, production 2003 2004 2005 2006 2007 2008 2009
growth should accelerate sharply on a yoy basis in the months Source: Bloomberg
ahead. I would be very surprised if Korea did not achieve
something like at least +30% production growth in December.
Japan’s industrial production increased strongly again in July:
1.9% mom, the fifth monthly rise. Since the trough in

HAN DE JONG +31 (0)20 628 4201 ECONOMICS DEPARTMENT

 7 September 2009

production, output has grown some 20%. Nevertheless, them to fall. In addition, some parts of the Japanese economy
production was still down 22.9% yoy, but that was considerably continue to be weak. The unemployment rate has risen to
better than the low of -38.4% in February. 5.7% in Japan. This may sound comparatively low, but it is
unprecedented in that country. Vehicle sales and home sales
US pending home sales were also stronger than expected. are also soft in Japan.
This may be due to the tax credit for first-time buyers which will Another area where I would like to see further improvement is
expire before the end of the year. Nevertheless, many US international trade. Asian countries were hit hard by the
housing market indicators have improved recently. On a yoy collapse in world trade. Their export and import numbers were
basis, US pending home sales were actually the strongest falling at a pace of 30% or worse. In recent months, these
since 2004. numbers have stabilised but they do not display a positive
trend on aggregate. That means that imports and exports are
US: ISM – employment growing at the same pace as last year prior to Lehman, but
index that is not really good enough. The yoy-rate of change will
improve in the months ahead as the comparison with 12
60
months earlier becomes easier; the base effect. The fact that
55
exports and imports are not really accelerating would appear to
50 be consistent with the Baltic Dry index (measuring freight
45 costs) which has weakened in recent months.
40
35 No early exit
Various international agencies, such as the OECD and the IMF
30
are urging policymakers not to change direction on their
25
stimulus policies any time soon. Still, various policymakers are
90 92 94 96 98 00 02 04 06 08
trying to explain their approach to exit strategies while also
Source: Bloomberg stressing that it is too early to implement them. Central bankers
are generally committing to loose policies for an extended
US labour market continues to shed jobs, but at a reduced period. I continue to believe that policymakers are going to err
pace. on the side of being ‘too late’ rather than ‘too early’. Having
The US economy has been shedding jobs since January 2008. said that, as we believe economic conditions are set to
It lost another 216,000 in August. And the unemployment rate improve more than generally assumed, we also think that the
jumped unexpectedly from 9.4% to 9.7%, the highest since first steps in the tightening process may still come a little earlier
1983. Nevertheless, we would label the report ‘mixed’. The than many assume, as policymakers may be forced to respond
loss of 216,000 jobs made August the best month since August to better than expected data.
2008. In addition, 216,000 was a little better than expected,
although there was a revision to previous months of some
50,000 in the wrong direction. The data on the duration of Due to a short holiday, there will not be a weekly comment
unemployment improved. The employment subcomponent of next week
the ISM survey has risen sharply in recent months, showing
the strongest post-recession improvement in decades,
although it must be said that it had fallen to extremely low
levels. At face value, that should mean that the labour market
should pick up soon.

Some negatives
While I am positive on the economic outlook, one must not lose
sight of the weak spots. When it comes to the labour market,
US initial jobless claims are still stubbornly high. We need

Important information
The views and opinions expressed above may be subject to change at any given time. Individuals are advised to seek professional guidance prior to making any investments.

This material is provided to you for information purposes only and should not be construed as an advice nor as an invitation or offer to buy or sell securities or other financial instruments.
Before investing in any product of ABN AMRO Bank N.V., you should obtain information on various financial and other risks and any possible restrictions that you and your investments
activities may encounter under applicable laws and regulations. If, after reading the brochure, you consider investing in this product, you are advised to discuss such an investment with
your relationship manager or personal advisor and check whether this product –considering the risks involved- is appropriate within your investment activities. The value of your
investments may fluctuate. Past performance is no guarantee for future returns. ABN AMRO Bank N.V. has taken all reasonable care to ensure that the information contained in this
document is correct but does not accept liability for any misprints. ABN AMRO Bank N.V. reserves the right to make amendments to this material.

HAN DE JONG +31 (0)20 628 4201 ECONOMICS DEPARTMENT