Business

Monday March 30, 2009

US stabilises, awaits recovery

Between The Lines - By C.S. Tan


THE US recession seems to have reached a trough, with the economy poised for a gradual recovery. Reflecting this optimism, the Dow Jones Industrial Average rose about 21% in the last two weeks, crossing the threshold of 20% that qualifies it to be called a bullish trend.

The latest economic data that shored up optimism came from sales of new homes and durable goods which were unexpectedly higher last month.

While the increase in demand for new homes was a small rise from record lows in January, it gave hope that the housing slump has found a bottom.

This is the third year of the retreat in housing demand, which had first surfaced in 2006. It’s about time the sector stabilised although data also show the inventory of new homes – houses and condos – is equivalent to a year’s supply, the highest in decades.

Even so, housing starts at an annual rate of 583,000 homes in the United States in February was 22% higher than in January.

Investors took heart that this was another piece of early evidence that new buildings have stabilised.

It is, however, by no means a sign of a strong rebound even though it was a 22% bounce from January. These are still very low levels of activity.

A long-term chart shows the norm of housing starts at 1.2 million to 1.5 million homes a year, about twice the latest figures.

A stabilised economy in the United States will generate confidence there and other countries that the worst is over, even if it may take some months more or next year before a strong recovery is felt.

The United States is an important pillar as its economy is more than three times that of Japan and of China, the world’s three largest economies.

China appears to be the first of the G-20 countries to resume the kind of high overall growth in its gross domestic product that it’s used to even if that is now skewed by government spending against a manufacturing sector that has seen a steep rise in the jobless rate.

The conviction among investors of the Chinese recovery led its stock markets to become the world’s best performing this year.

The Shanghai Stock Exchange Composite Index is up 30% in the three months this year while the Composite Index of the Shenzhen Stock Exchange is up 40%.

There has been renewed interest in emerging markets this month although most of the foreign funds seem to have flowed to the BRIC (Brazil, Russia, India and China) markets.

All four markets are in positive territory this year, outperforming the US market.

If economies have found a bottom in the first quarter, so might companies in some sectors.

This may be the case for semiconductor companies which are widely expected to continue to be in the red this quarter, with the likelihood of recovering in the second or third quarters. Taiwan Semiconductor Manufacturing Co (TSMC), for instance, indicated it will post a loss in the first quarter but it raised its sales and earnings forecasts earlier this month, citing recent orders from China. TSMC is the world’s biggest custom-chip maker.

The world’s number two, United Microelectronics Corp, has posted a loss but has similarly indicated it believes the demand drop has bottomed out.

While export-oriented manufacturers are expected to post weak results in the first quarter, companies that sell consumer goods in Asia will show a healthier resilience.

Market observers will be closely watching the US consumer market which will be key for a recovery of Asia’s large export sector.


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