Economics – The U.S. Economy Is In Tatters

December 10, 2008 at 8:46 am Leave a comment

Weekly Review: 1st – 8th Dec 2008

United States – The latest Beige Book highlights that economic activities weaken significantly at every nook and cranny in the United States. The economic sectors sink terribly and the employment market shrinks sharply in the country.
Worrisome as the present economic situation is, this is generally in line with our expectation that the economy would get worse before it gets better in 2H09.

The Beige Book published on 3 December 08 highlighted that overall economic activities in the United States weakened across all districts. Retail sales decreased and vehicles sales were down significantly, as consumer spending dipped. Activities in the services sector generally contracted. Industrial activities declined and new orders were soft. The housing markets were weak, as selling prices reduced and sales activity slowed.
Residential, commercial and industrial lending shrank. Agricultural conditions were mixed with a relatively good harvest, but concerns about profitability remained. The conditions of the labour market worsened and wage pressure was largely subdued.

The worsening economic conditions were reflected in the performances of the manufacturing sector and the services sector. The manufacturing sector contracted in November 08, as the ISM Manufacturing Index registered 36.2% and it was 2.7 percentage points lower than the 38.9% reported in October 08. This is the lowest reading since May 1982. The two industries reporting growth in November 08 were apparel, leather and allied products; and paper products, while the industries reporting contraction were non-metallic mineral products; fabricated metal products; textile mills; printing and related support activities; machinery; electrical equipment, appliances and components; primary metals; transportation equipment; furniture and related products; plastics and rubber products; computer and electronic products; chemical products; petroleum and coal products; miscellaneous manufacturing; food, beverage and tobacco products; and wood products.

As for the services sector, the non-manufacturing index registered 37.3%, its lowest level since January 98 (see Figure 2). The index stood at 44.4% in the previous month. The decline was due to a fall in the business activity index, the new orders index and the employment index. The one industry reporting growth in November 08 was healthcare and social assistance, while the seventeen industries reporting contraction were transportation and warehousing; arts, entertainment and recreation; real estate, rental and leasing; professional, scientific and technical services; finance and insurance; agriculture, forestry, fishing and hunting; accommodation and food services; public administration; educational services; support services; mining; wholesale trade; utilities; retail trade; construction; information and other services.

A whopping 533,000 jobs were cut in the non-farm sectors in the United States in November 08 and it is the largest since 1974. In the previous month, the job losses amounted to 320,000. In total, the country had lost about 2m jobs since early this year. While the unemployment rate trended up only slightly from 6.5% in October 08 to 6.7% in November 08, it is expected to surge to about 10.0% over the near term

Worrisome as the present economic situation is, this is generally in line with our expectation that the United States economy would get worse before it gets better in 2H09. Admittedly, the present economic situation of the United States is worse than expected and the real GDP growth of the country is estimated to shrink by no less than 3% on a y-o-y annualised basis in 4Q08.

Malaysia – The export growth took a sharp turn for the worse in October 08, as almost half of the world economy was in a recession. This reinforces our expectation that the y-o-y real export growth for 4Q08 would dip significantly by 9.1%. We maintain our estimate that the y-o-y real GDP growth for the final quarter of this year would slump to about 1.3-1.5% from 4.7% in 3Q08.

The export growth of Malaysia for October 08 took a sharp turn for the worse in October 08, as the economies of the United States and the Euro Zone contracted, and the economic growth of China slowed noticeably. The y-o-y growth of overseas shipments from Malaysia dipped sharply from 15.1% in September 08 to -2.6% in October 08. Given high import contents, it is not surprising that the y-o-y import growth of Malaysia also shrank considerably from 11.9% to -5.3% during the period.

The decline in the Malaysian exports in October 08 was mainly due to smaller overseas shipments of electrical and electronic products, palm oil and chemical products, which fell by 12.6%, 4.6% and 6.3%, respectively. The y-o-y export growth of crude petroleum also dropped from 57.1% in September 08 to 5.8% in October 08. Meanwhile, exports from Malaysia to the United States, the European Union member countries and China declined significantly in October 08 by 18.9%, 11.4% and 7.0%, respectively.

To be sure, Malaysia was not the only country in the region which experienced a big decline in exports in October 08. As shown in Figure 6, both Taiwan and Singapore registered a sharp drop in exports as well. As for Indonesia, Thailand and South Korea, their export growth in October 08 had also declined rather significantly. This reinforces our expectation that the y-o-y real export growth of Malaysia for 4Q08 would dip significantly by 9.1%. We maintain that the country’s y-o-y real GDP growth for the final quarter of this year would slump to 1.3-1.5% from 4.7% in 3Q08.

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