Monday, November 9, 2009

Weekly Hurriyet Column: Jobless and joyless recovery

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. For a change, there is no cheesy movie reference this time around. As for the column, the unemployment data that were disclosed a week after my column revealed that I had in fact been too optimistic on the timing of the turnaround in unemployment, which did not wait for year-end to get started...

The debate on the shape of global recovery has been going on unabated for some time, with everyone choosing their favorite letter, leading some to declare, more than three decades after the Fab 4, that all you need is LUV.

This scenario of an L-shaped recovery for Europe, U for the United States, and V for emerging markets is definitely plausible. But more importantly, recent data, while definitely not strong enough to justify markets’ performance, have made it less likely for a W-play. In fact, last week’s October Purchasing Managers Indices, or PMIs, are suggesting a gradual recovery in major developed countries irrespective of the shape of recovery.

While markets tend to give much more weight to PMIs as a leading indicator than proven by empirics, if they’ll be taken at face value, the only country defying trend is Turkey, where the index has been slowly creeping down after registering sharp rises in the second quarter, hinting that the recovery has been losing pace. Unfortunately, the Turkish PMI has been not only consistent with the Central Bank’s own real sector confidence index, but also confirmed by actual data.

However, a glimmer of hope has come recently from trade statistics. Not only there is a considerable increase in imports of consumption goods in the September figures, preliminary October data from Turkish Exporters Association has shown the first yearly post-Lehman rise in exports. Even more importantly, imports contracted less than exports for the first time since trade dried up after the Lehman collapse, a strong indicator that things are going back to normal.

But these positive signs should not lead to overjubilation: For one thing, the increase in consumption imports is mainly in autos, as consumers scrambled to take advantage of the expiring tax reductions. As for the improvement in preliminary exports, the rise looks less impressive once you notice the low base. In this sense, this week’s data releases will help to clear up the picture a lot.

Friday’s September trade indices will provide a better indicator on the normalization in trade, whereas today’s September industrial production and Wednesday’s October capacity utilization figures will show if the stir in imports has spilled over to domestic production. Tuesday’s CNBC-e consumption indices for October, on the other hand, will reveal the health of the consumer.

Even if all of these data confirm the Turkish recovery, a jobless recovery is bound to be joyless. In fact, I see the recent employment statistics, which have been showing seasonally-adjusted unemployment falling for two consecutive periods, as misleading. For one thing, the decrease in unemployment is partly due to the decrease in the rate of extra workers entering the labor force.

This added-worker effect, which was boosting unemployment earlier in the year, is likely to stay unemployment-friendly in the next release on November 16 and even for a couple of months more, after when it could reverse without strong growth. A shift out of agriculture, which has been seeing bloated employment figures for the past year due to the crisis, will only add insult to injury.

Interestingly enough, the employment side of the Turkish crisis has got little attention from the government so far. Despite having the highest unemployment rate in the G-20, Turkey is one of the eight countries in the group that does not have any labor measures in its 2009 fiscal stimulus program, according to a recent report from the IMF. With elections looming, I wonder how long this can go on.

In fact, the unemployment picture is yet another reason why the 2010 budget looks detached from reality. This is where I will pick up next week.

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