GLOBAL ECONOMIC REPORTER

Latest statistics from the Federal Reserve show that U.S. industrial production declined less in June, another sign that the economy is gradually turning around.  The Industrial Production Index declined 0.4% in June, compared to a 1.2% decline in May, and 0.7% decline in April.  Industrial capacity utilization for the month of June stood at 68%, a slight decrease of 0.2 percentage point from May.  The average capacity utilization rate between 1972 and 2008 is 80.9%.  The lower than average capacity utilization rate suggests inflation remains constrained and does not pose a major threat to economic recovery in the near term.

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The latest Empire State Manufacturing Survey, conducted by the New York Federal Reserve Bank, shows that business conditions in the state improved a bit in July and business outlook is generally favorable.  The General Business Conditions Index rose 9 points to -0.6, indicating conditions have not changed much over the month.  The New Order Index rose above 0 for the first time since September 2008 from -8.2 to 5.9.  The Shipments Index also rose from -4.8 to 11.0, the highest level in a year. 

Other Highlights:

• The Inventories Index declined 11 points to -36.5, a record low as businesses emptied their inventories at a rapid rate.   
• Input prices started to clime, reversing 7-month long declining trend. 
• Employment indices reamined negative and close to June readings, indicating a still weak labor market in the manufacture sector. 
• The Future General Business Conditions Index fell 14, but remained well above 0, suggesting cautiously favorable outllok for the next 6 months. 

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The U.S. Bureau of Labor Statistics (BLS) reported today that the Consumer Price Index for All Urban Consumers (CPI-U) was up 0.7% in June from the previous month and up 0.9% from the previous year after seasonal adjustment.  Fuel prices rose sharply in June.  The Energy Index increased 7.4% in June, driving the overall price level up.  The core inflation rate, which excludes energy and food prices that are more volatile, was only 0.2% in June, the average of the past 6 months. 

Inflation does not appear to be a near-term threat as the economy slowly reels back from the worst recession in more than 7 decades.  But the assessment depends largely on the movement in fuel prices.  Currently crude oil prices hover around $60 per barrel and most analysts expect it to maintain at that level through the end of 2009 and begin to rise in 2010 as the global demand is expected to recover.  Should the global economy revives faster than expected, inflation would rise faster in coming months. 

A Closer Look

• Housing price index was unchanged from May and declined 0.1% from the previous year.  Housing prices continue to decline on average, although the rate has been slower in the past couple months.  A real revival in the U.S. housing market is not expected to come till the economy is well recovered. 
• The recession has dampened the growth in health care costs a bit.  Medical care cost rose 0.2% from previous month or 3.8% since the beginning of 2009.  This is substantially lower than the pre-recession rate of 5.2% in 2007. 

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The U.S. Census Bureau reported today that advance estimates of retail and food services sales were up 0.6% from the previous, but down 9.6% from a year ago.  The total sales for June were $342.1 billion.  Total sales for April and May of 2009 were $338,344 and $339,932, respectively.  The statistics is further evidence the U.S. economy is hitting the bottom and slowly turning around. 

A Closer Look:

• Industries with higher sales than previous month: Gasoline Stations (+4.96%), Motor Vehicle & Parts (+2.33%), and Electronics & Appliances Stores (+0.92%).
• Industries with lower sales than previous month: Building Materials & Supplies (-0.93%), Food Services & Drinking Places (-0.86%), and General Merchandise Stores (-0.42%).

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The Central Bank of Canada released the Business Outlook Survey for the summer. The survey respondents expect business conditions to improve for the next 12 months. 61% of the firms surveyed expect the sales volume to increase faster than the previous 12 months, an increase of 31 percentage points from the last survey in Q1 of 2009. The percentage of firms expecting slower sales fell to 23% from 52% in the last survey.

Other Highlights:

• Firms also expect to hire more workers. 39% say they would increase the level of employment versus 17% that say they would decrease. In the last survey, 25% of the surveyed firms said they would hire more workers and 26% said they would hire less.
• Investment in machineries and equipment remains cautiously slow. 27% of the surveyed firms expect to increase capital investment while 39% plan to cut back. In the last survey, 26% said they would increase capital investment and 40% said they would cut back.
• Inflation pressure gradually increases but remains low. 49% of the surveyed firms expect inflation to be between 1% and 2% in the next 24 month. As a comparison, 41% expected it to be less than 1% in the last survey.
• Credit conditions eased. 33% respondents reported credits have tightened over the past 3 months compared to 44% who reported so in the last survey. 21% in the current survey reported credits have eased compared to 8% who said so in the last survey.

The Cabinet Office of the Government of Japan released its monthly survey of consumer confidence for the month of June. The result shows Japanese consumers are less gloomy about the state of the economy. The overall confidence index rose 0.8 percentage point to 38.9 from a month earlier and 4.4 percentage points from June of 2008. June marks the 6th consecutive month of improvement in consumer confidence since December of 2008, where the index hit a historic low of 27.6.

Other Hightlights:

• 3 of the 4 sub-indices registered gain from previous year, 2 substantially. The overall-livelihood index showed 5.4 percentage points increase from a year ago and the willingness-to-buy-durable-goods index increased by 14.8 percentage points frmo a year ago.
• The income-growth index declined by 3.1 percentage points from a year ago.

Japanese Consumer Confidence Index

Data source: E.S.R.I., Gov’t of Japan

General Motors emerged from bankruptcy and started new operations today. The quick 40-day bankruptcy proceeding gave birth to a new GM that is leaner and more competitive. The new GM keeps 4 of the 8 original brands:Chevy, Cadillac, Buick, and GMC while the remaining 4 brands (Pontiac, Hummer, Saturn, and Saab)are sold off to other companies or in the process of being sold. The Chinese firm, Sichuan Tenzhong Heavy Industrial Machinery Company, bought the Hummer brand in June. Roger Penske, owner of sevearl automobile related businesses, entered a pending purchase agreement of the Saturn brand with GM.

Other Highlights:

• The number of GM dealers in the U.S. will be reduced from the current level of 6,000 to approximately 3,600 by the end of 2010.
• The CEO, Fritz Henderson, vowed to make the new GM a public-traded company as soon as possible. The U.S. government currently owns 60.8% of the new GM. Henderson also pledged to repay U.S. federal government loans by 2015.

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A quarterly report by 3 European research institutes (German Ifo institute, French INSEE institute, and Italian ISAE institute) finds that although the eurozone remains in recession, the economic contraction is expected to lessen in the coming months. Real GDP declined by 2.5% in Q1 of 2009 after a decline of 1.8% in Q4 of 2008, but real GDP is expected to fall by only 0.6% in Q2, and by 0.4% in Q3 and Q4 of 2009.

Other Highlights:

• Consumer spending, the largest part of the GDP, is expected to fall by 0.6% in Q2, 0.4% in Q3, and 0.5% in Q4 of 2009 after adjusting for inflation.
• Investment by businesses is projected to decline by less in the coming quarters: -3.2% in Q2, -2.5% in Q3, and -1.4% in Q4.
• Assuming the crude oil price hovers around $70 USD per barrel, the Dollar-Euro exchange rate is expected to fluctuate around $1.40 per Euro over the next few months and inflation is expected to inch up to -0.1% in September and 1.0% in December.

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The Employment and Training Administration (ETA) of the U.S. Department of Labor released its weekly report on the unemployment insurance (UI) claims. The data suggest a gradually improving U.S. labor market. Seasonally-adjusted initial claims for the week ending July 4 was 565,000, a decrease of 52,000 from the previous week’s 617,000. The lower UI claims may not pull down the unemployment rate as job creation remains slow at best, but the growth in the unemployment rates will certainly be much slower than the rapid increase in the first half of 2009.

Other Highlights:

• The advance seasonally-adjusted insured unemployment rate was 5.1% for the week ending June 27, a slight increase of 0.1 percentage point from the previous week. The insured unemployment rate measures the fraction of the labor force that is currently unemployed and receiving UI benefits.
• The number of laid-off workers receiving UI benefits as of June 27 was 6.88 million.
• States with largest decrease in UI claims: Florida (-12,493), Illinois (-5,321), and Pennsylvania (-3,949)
• States with largest increase in UI claims: New Jersey (+7,876), Massachusetts(+4,730), and Kansas (4,469)

Weekly Initial Unemployment Insurance Claims (10,000s)

Data source: BLS

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78 banks have failed since the start of the current recession according to a list published by the Federal Deposit Insurance Corporation (FDIC). The National Bureau of Economic Research (NBER) Business Cycle Dating Committee dated December of 2007 as the start of the current recession, which has continued for 18 consecutive months, the longest since the Great Depression when economic contraction lasted 43 months from August 1929 to March 1933.

The failed banks are mostly small banks that serve local or regional markets. The state of Georgia is home to the largest number of the failed banks (14), followed by Illinois (13), and California (11).

The number of failed banks is surprisingly small when compared to previous episodes of economic recessions brought about by some financial crisis. 531 financial institutions failed in 1989 alone at the height of the Savings and Loans crisis. From 1985 to 1992, altogether 2,106 financial institutions failed. More than 10,000 banks failed during the Great Depression. The relatively small number of failed banks during this crisis, despite the severity of the economic contraction, results in part thanks to more timely and globally-coordinated policy responses this time around by historical standard.

Number of Failed Banks since 2000

Data source: FDIC