Signs of a global economic recovery are everywhere. So are signs of a global economic catastrophe.
Should you spring for that new in-ground swimming pool? Or is it time to squirrel away canned food and ammunition in the basement? With reams of contradictory news landing on the doorstep each morning, it’s tough to figure out whether things are getting worse or better.
The trick is to spot early warning signs, which are often more atmospheric than scientific. Not everyone can search the business-class cabins of trans-Pacific flights to see if they are suddenly filled with deal-hungry investment bankers instead of bleary-eyed International Monetary Fund economists.
The signs of recovery will arrive in two pieces. The first is financial: the markets for stocks, bonds and currencies. The second is economic: factories, jobs and wages.
To help you come to your own conclusions about the course of the global financial crisis, here are several things to watch.
You’ll know that the crisis is coming to a close . . .
– When bad news hits and the market yawns. Perhaps the most reassuring sign that the panic has eased will come when the markets are hit with terrible news–say, a Brazilian devaluation or Russian default on World Bank debt–and nothing happens.
This fall, Brazil came under pressure after Russia’s rash decision to devalue the ruble and stop paying some of its debts. Bad news in one place became bad news for another. When investors are no longer blinded by panic, they will be able to pause long enough to realize that Russia’s actions have nothing to do with the risk of investing in Brazil.
– When people who invest in emerging markets settle for less. An instant measure of investors’ skittishness is how much they demand for putting money into Thai corporate bonds or Argentine treasury bills. When investors are more confident that the Thais or Argentines will pay off those debts, they will accept a lower profit.
The distinction is visible in the gap between the return on a high-risk gamble–a Venezuelan government bond, for instance–and a U.S. Treasury bill. A widening gap signals that investors are getting scared; a narrowing gap shows that calm is returning to the financial markets.
– When foreign stock markets stop gyrating. Over time, stock prices may reflect corporate profits. But in the short run, they are symbolic of investors’ faith in a country’s future. Right now, the market to watch is Brazil’s Sao Paulo Stock Exchange and its benchmark index, Bovespa. The South American giant is considered the last firewall keeping financial panic out of the rest of Latin America. So far this year, Bovespa has dropped 18.4 percent amid extreme volatility as investors have reacted sharply to economic news, good or bad. A steady, sober increase in the market would be evidence of nerves being soothed.
“Even going up 4 percent in one day isn’t healthy,” says Michael Hood, Latin America economist for J.P. Morgan. “What you’d like to see is a return to having the thing move 1 percent a day, rather than huge moves that are indicative of rapidly changing circumstances.”
– When inflation jitters return. When the worriers start worrying about inflation again, it would signal that they believe the Federal Reserve is less concerned about the possibility of a deadly bout of global deflation or a further financial meltdown.
One way to gauge inflation jitters is to track the performance of the Treasury’s inflation-indexed bonds. These bonds offer a fixed interest rate, plus additional interest equal to each year’s official inflation rate. When investors believe that inflation isn’t much of a threat, the gap between the interest rate on an inflation-adjusted bond and a regular 10-year Treasury bond shrinks during bond auctions. When investors turn their attention from recession to inflation, the gap widens.
If that gap increases somewhat, you will know that the worriers are again worrying about everyday problems like inflation. “That would suggest that the world might be repairing itself,” says Deputy Treasury Secretary Lawrence Summers.
– When commodity prices start to rise. Prices of commodities such as copper, wheat and oil were one channel through which the economic problems in Asia spread to the rest of the world. As the Asian economies sank like anchors, their appetite for oil and other commodities dropped, too. Commodity prices fell sharply, providing a windfall for other countries that import them. But falling prices wreaked havoc on Venezuela, Mexico, Chile and other commodity producers that depend on oil or copper revenue to build schools, pave roads and subsidize essentials for the poor.
When the Asian economies start to grow again, the reverse will happen. Asian countries will buy more raw materials, push up prices and create more revenue for commodity exporters. (Consumers can track commodity prices by monitoring the widely published CRB-Bridge Futures Index.)
– When developing countries start importing more. The mere fact that a troubled country manages to post a trade surplus isn’t itself evidence that the economy is recovering. Just look at Korea. Soon after the country succumbed to the Asian turmoil, its trade surplus began to grow, to $32 billion in the first 10 months of this year from $8.5 billion in 1997. But that wasn’t due to a helpful increase in exports; they actually declined slightly. The real cause was that Koreans suddenly found themselves unable to afford imported goods, and imports fell 38 percent.
The real test of economic recovery is whether both exports and imports are on the rise. Exports create jobs and growth; imports are a sign that people and companies again have money to spend.
– When container ships arrive full and leave full. The Port of Long Beach, Calif., the largest container port in the U.S., is a window on the economic health of Asia. The vast majority of ships that dock there ply Asian routes. The inbound flow of toys, apparel, shoes and other Asian products has risen steadily during the past year. But ships heading back to Asia have carried ever-growing numbers of empty 40-foot metal containers; Long Beach’s traffic of empties has increased 55 percent during the past year.
“Obviously it reflects the weakness in the Asian economies,” says port spokesman Art Wong.
When those empty containers start to fill up again, that’s a sign that an economic recovery is under way in Asia. The Port of Long Beach posts the numbers monthly on its Web site, www.polb.com. Perhaps tellingly, October marked the first time since March that monthly traffic in loaded outbound containers increased. A few more months like that, and port watchers can draw some comfort about the course of the Asian economic crisis.
– When Japan’s economy begins to expand. Japan is the world’s No. 2 economic power, but it has been years since the country has acted that way. Its banking system is riddled with bad debts, its consumers are cowed by fear of economic collapse, and many of its businesses have been protected from foreign competition for so long that they have grown stale.
The ripple effects of a Japanese resurgence would be dramatic, generating economic growth in the many Asian nations that sell their wares in Japan.
One way to peer into the near-term future in Japan is to track the Bank of Japan’s quarterly tankan survey of corporate sentiment. The survey, last released on Dec. 14 has shown an ever-deepening pessimism among Japanese business executives.
– When the pessimists are wrong, for once. Few investors or economists saw how serious the global crisis would become. For a long time it was called the “Southeast Asian” financial crisis, as if it would stop there. Every six months since, the IMF has been forced to downgrade its world economic-growth projections. Eventually, however, economists will be surprised by some good news, and that will likely signal the beginning of the end of the crisis.
Perhaps the best news of all will be the resignation of Treasury Secretary Robert Rubin, the well-respected crisis-manager-in-chief. Administration insiders once expected that Rubin would be long gone by now. Today they expect him to stay put until he believes the risk of calamity has passed.
