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Investment view

The start of the month always brings a wealth of economic data and November has been fuller than usual with the figures that analysts so like to pore over. America has moved into recession (bad) with the publication of third-quarter GDP figures. Consumer confidence is ebbing (unsurprising) on both sides of the Atlantic and purchasing managers everywhere seem to be taking the view that the commercial world is a curate&#39s egg. Make of that what you will.

Of course, the old saying that there are lies, damn lies and statistics should not be forgotten. GDP figures in particular have a habit of being revised often and significantly. It seems unlikely that third-quarter economic activity in America will ultimately show a positive result but the 0.4 per cent that the economy was said to have contracted – less than many expected – may not end up the final story.

Perhaps more significant is the confirmation that unemployment is now rising sharply in America although the contention that the number of people out of work is at an 18-year high seems strangely at odds with earlier jobless data. Perhaps this is one side effect of the terrorists&#39 attack on America. Layoffs have accelerated, driving unemployment up from a low of under 4 per cent to around 5 per cent.

One of the strangest aspects surrounding these figures is that, despite the general tone being downbeat, the announcement of what is happening appears to have been sufficient to steady share prices. After some quite significant profit taking following the bounce that took place, markets last week ended on a better tone. There were plenty of individual concerns but a degree of nerve was regained. History tells us this is a fairly standard outcome in a traditional cycle. A traditional cycle certainly seems to be what we have. All that optimistic talk about ending the boom/bust conditions of the past have been swept aside – not by the events of September 11 but by the reaction to the bursting of the technology bubble and the slowing of an overheating US economy.

The belief is that by the second or third quarter of next year we will see the economy on the up. This is not being overoptimistic. If, indeed, recession retains its grip until then, this will have been one of the longest downturns experienced since the Second World War. Indeed, this has been one of the worst bear markets in the post-war period, comparable in some measure with the great equity contraction of 1973/4. There was a war at the heart of that collapse as well and the recession was every bit as deep as that which the Americans look as though they are about to experience.

But will we suffer the same poor economic conditions in this country? Not if some of the statistics and other signs that are emerging are to be believed. The Chartered Institute of Purchasing and Supply came out with some very mixed results in its monthly survey. Manufacturing, with its reliance upon exports, is still in the doldrums. The construction industry, which is domestic in its focus, is still expanding. Indeed, this was the 33rd month in succession that this particular industry appears to be growing.

Do not underestimate the importance of such information. Construction is a strong driver of the business cycle, so GDP growth will be supported by this sector as we move into 2002. Can we square this with a fall in house prices? Most certainly we can. Construction activity is all about Government spending and faith in the future. House prices were due a pause. Like the technology market, valuations cannot expand indefinitely. A slowing in house price inflation will make it that much easier for the monetary policy committee to cut interest rates. And that will be no bad thing for the economy and for markets.


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