April 06, 2006,
Global Growth Inflates . . .
. . . as the GOP deflates.
Recent data suggest the global economy is accelerating, not slowing. The ISM Manufacturing Index (PMI) averaged 55.6 during the first quarter of 2006, a level consistent with 4.7 percent real GDP growth for the U.S. economy. The ISM data also showed that order backlogs have risen to the highest level since May 2004, which means that, despite the hopes and dreams of the bearish but wrong camp, a significant air pocket after a robust first quarter is unlikely. Meanwhile, the ISM-Non-Manufacturing Index for March showed that new export orders averaged 60.5 during the first quarter, the highest three-month average on record and yet another sign that the global economy is gathering momentum.
Even the previously moribund economies in the European Monetary Union (EMU) seem to be picking up a head of steam. German business confidence has risen to a fifteen-year high, suggesting that the German economy could accelerate to a robust 4 percent growth pace. This surge in confidence comes against the backdrop of double-digit growth in the European Central Bankís (ECB) balance sheet and barely positive real short-term interest rates.
In other words, the aggregate demand function is shifting out in the eurozone, which should catalyze sectors tied to the expansion path of the nominal economy. Ultimately this will be inflationary so EMU countries need to do more to lower tax rates and reduce labor and business regulations (an outward shift in the aggregate supply schedule) if they want to raise productivity and thus non-inflationary growth.
The good news doesnít stop with Europe, either. Japanís recovery cycle has come full circle, with its nominal economy returning to life after a fifteen-year deflationary coma. Yen gold prices are trading more than 70 percent above their ten-year moving average, which means monetary deflation in Japan has been defanged by a significant drop in the value of the yen unit of account.
Japanese profits have been compounding at a double-digit rate for 11 consecutive quarters, the Nikkei 225 Index is up 67 percent since 2004, and Tokyo land prices rose at the fastest pace since 1988 during last yearís third quarter. Loan growth has turned positive and the annual change in monetary velocity the testosterone behind the high-powered money stock is running at six-year highs after collapsing like a rag doll during Japanís deflation.
Record highs in global equity bourses, all-time highs in industrial commodity indices, and never-before-seen lows in emerging-market credit spreads arenít consistent with a slowdown, stall, or slump in the global economy. In other words, the global growth bears should prepare to wipe the egg from their faces once again.
Unfortunately, the positive outlook for the next several quarters doesnít remove real long-term threats to growth. Protectionist and xenophobic perturbations from both parties in Congress have blown the pro-growth policy agenda off course. Instead of permanently extending the most successful tax cuts in more than two decades, a two-year extension seems to be the best anyone can hope for. Protectionism is running rampant in Republican ranks while Democrats largely remain stuck in a no-growth neo-Malthusian time warp. This is not leadership.
Thereís still time to right the policy agenda, however. A House-Senate conference committee may vote to extend the 2003 tax cuts on dividends and capital gains for two years as soon as Friday. This is positive news, but there are no guarantees. November is fast approaching, which means the clock still ticks.
Michael T. Darda is the chief economist and director of research for MKM Partners, an equity execution and research boutique located in Greenwich, Conn. He welcomes your comments here.