EVERY CYCLICAL TURN IS UNIQUE

FERRIER INTERNATIONAL thanks Cees Bruggemans, Chief Economist of FNB for this article which we share with you.

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Every cyclical turn is unique

By Cees Bruggemans, Chief Economist FNB
30 June 2009

The only thing cyclical turns have in common is that they turn. Other than that, the way of their turning can be pretty unique.

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Consumer confidence has proven itself a leading indicator at most turning points of the business cycle, leading by up to three quarters at the upper turning point, and with much less of a lead at lower turning points.

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But each cyclical turning remains pretty unique, and today’s turning is probably no exception.

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With the economy having completed two quarterly GDP declines (4Q2008 and 1Q2009), with the current quarter (2Q2009) also shaping as a decline, and with the next quarter (3Q2009) probably being touch-and-go, we are still in recession and some way from exiting, probably only from the 4Q2009.

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Yet the FNB/BER consumer confidence index allegedly signaled the coming cyclical upturn BEFORE the economy was even close to entering actual recession.

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Some of this may be optical illusion, to be blamed on Eskom, OPEC and SARB (fun partners indeed). Their doings early last year were shocking enough to trigger a near record decline in the FNB/BER consumer confidence index to -6 in 2Q2008.

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That marked a cyclical low, if still in pretty much neutral territory, especially considering previous cyclical lows these past three decades.

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In contrast, full-blooded consumer recessions in the past have shown confidence readings of closer to -30 (1985) or even -20 (1993). The 1998/99 cyclical low point (supposedly no recession) was much less intimidating. The even lower 2001 low point probably mainly reflected anxiety about events (shocking Rand decline and its possible implication for interest rates, on past experience) rather than the reality of recession.

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If the 2Q2008 rate of descent had been just a tad less shocking and the consumer more gradual in her loss of confidence, 4Q2008 may have been the cyclical low at -4.

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That would already have been more believable as a turning point signal, coinciding with the worst part of the global hit to our industrial output and mining exports, and the start of the SARB interest rate cutting cycle.

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So perhaps write off a 2Q2008 turning point in consumer confidence to coincidence and exceptional shock value of preceding events which ultimately had little bearing on the recession of 2009 (triggered as this ultimately was by the late 2008 global events, really).

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Even so, we have to use the data we have. What makes 1H2008 so extremely unique is that the entire descent in confidence was achieved in two quarters of uninterrupted rapid decline (something widely remarked upon at the time, everything happening so shockingly fast), with less than a year distance from the peak exuberance.

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The last time South Africa experienced catastrophic decline in consumer confidence was in 1984/85, but it took at least four quarters to fully reveal itself and the low point was at least five years removed from its 1980 peak.

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The 1993 collapse also took four quarters, and again five years removed from its 1988 peak.

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The 2001 low (two years past the growth recession of 1998/99 and six years after its earlier peak), is even more of a bizarre slow coach.

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So the bad news of the past year has to be the abrupt nature of exuberance loss in early 2008, but thereafter the recession was very focused (in industrial export activity and interest rate sensitive sectors). Over the subsequent twelve months consumers started to signal better times ahead even if the economy was still in the full grip of a globally induced recession.

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Even though a growing majority of consumers continue to indicate the present is not a good time to buy durable goods, they did so unfailingly as well in previous cyclical downturns and continued to do so long after their forward-looking views about the economy and their own finances had started to improve.

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On this score, therefore, we should not read too much in the very depressed confidence readings about buying durables today. Such sentiment seems to lag as caution lingers. Meanwhile, actual cyclical recovery starts elsewhere in the economy (inventory destocking slows, ends and eventually reverses thereby boosting output).

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Indeed, such sentiment seems to generally lag as well the early birds which start the consumer revival in durable consumer buying. Apparently, the majority of consumers seem to take their time being converted to more positive readings about the present being a good time to buy durable goods.-?-? -?-?-?-?

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Cees Bruggemans is Chief Economist of First National Bank. Register for his free e-mail articles on www.fnb.co.za/economics

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Ferrier International keeping you informed.

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