For its preferred economic forecasting tool, San Francisco-based SouthBay research looks at chips–as in data chips, not the chocolate or potato variety.
And what do the chip orders, and other West Coast-centric indicators such as Internet usage rates, say? Hint: there is a good chance you will find a lump of coal in your holiday stocking this year.
Based on its analysis of our nation’s consumption of silicon wafers and its telecommunication of bits and bytes, the firm is forecasting a slowdown from the current period of improved growth. That in turn could mean more quantitative easing from the Fed and, as a result, a weaker dollar.
For now, the minutes from the Federal Open Market Committee’s March 13 meeting, released at 2:00 p.m. EDT Tuesday, have given the dollar a lift, partly because it included modest upward revisions to the Fed’s gross domestic product growth forecasts. But there was still plenty of material in that write-up suggesting that the doves on the committee remain a force. And Fed Chairman Bernanke and others have left it crystal clear that if U.S. economic data were to weaken considerably, more QE would be forthcoming. As with past policy moves of this nature, the dollar would likely weaken on that.
According to SouthBay Research and its founder Andrew Zatlin, weakness in the most recent semiconductor data point to the kind of problems that might trigger more QE, not now but toward year-end. That could suggest that retailers foresee a weak 2012 holiday season for computer products, or that businesses are reluctant to invest in computing due to concerns about the longer term economic outlook .
The reason: there is a six-month lag between orders for semiconductors and their actual delivery time.
April is when global supply chains begin gearing up for sales for the fourth quarter. And with the first quarter over, semiconductor conditions have been gloomy and worse than expected. There has been no pickup in inventory, minimal increases in shipments and weak demand across multiple sectors, says SouthBay, whose own index for semiconductors continues to signal little willingness among investors to boost inventories.
This is not a good signal for business investment, a key component of GDP. And it coincides with a February factory orders report released Tuesday, whose weakness implied declining corporate investment and a challenge to GDP growth, according to Steve Ricchiuto, chief economist of Mizuho USA.
The head winds of ongoing public sector weakness, limited household spending growth and trade imbalances are all contributing to what is seen by businesses as a global growth slowdown. And, as a result, it seems they’re not investing in computers–despite the improvement that the U.S. economy has seen in recent months.
SouthBay Research, founded in 2009, claims to have one of the lowest forecasting mean error rates for predicting job trends. The company mines the Internet for data points using proprietary algorithms that extract high frequency real-time data points from 45 major metro areas.
The good news, if you can see it that way, is that the firm’s data don’t suggest immediate US economic weakness. So there’s likely no need to rush to sell dollars–a heartening thought to those who jumped into the greenback after the FOMC minutes.
There’s a certain consistency between SouthBay’s forecasts and the way I see events in the global economy playing out.
In the first half of the year, in which the dollar will remain well bid, the pressure will remain in Europe, due to austerity measures that are causing European growth to stagnate. After that, however, via both trade and financial transmissions from Europe’s problems, weakness will shift across the Atlantic to U.S. shores as uncertainty over the outcome of the U.S. election grows. There’s a real risk that a divided Congress will fail to reach a compromise that averts a massive wave of growth-killing spending cuts and tax hikes scheduled for the end of this year.
The best bet would be to stay long dollars for now through the second quarter and watch the economic data. When and if it turns, the dollar will go negative with it, as the Fed’s response will likely be swift. Trust me, betting against a central bank can be quite the painful experience.
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