Recession In Europe Likely To Worsen Before Recovery

November producer prices for France may tell us if the recession in Europe is still likely to get worse before it gets better. Later in the day, the last US weekly jobless claims report released in 2012 arrives, followed by the November update on new US home sales.

France Producer Price Index (07:45 GMT): Is the worst of the Eurozone recession behind us? No one’s expecting a revival in the economy in terms of the Continent-wide numbers in the fourth quarter, but today’s update on producer prices in France may offer a clue about the odds that a macro bottom has been reached. Disinflation/deflation, after all, is not conducive to growth. If there is statistical support for thinking positively it will likely be reflected in prices that are rising generally rather than falling. Alas, the recent update on consumer prices for November is not encouraging: the CPI index fell more than expected.

How will today’s update on prices in the industrial sector for France compare? Some economists are expecting another gain, although that is hardly a universal forecast. Considering the weakness in consumer inflation last month, the prospects that producer prices will buck the trend is questionable. This much is clear: a relatively large decline in producer prices for November will be greeted as one more sign that Europe’s second-largest economy still faces a long road toward economic recovery.

Falling inflation is generally greeted as good news, of course, but it is a sign of distress when an economy is in recession. It is tempting to focus on the higher purchasing power that accompanies lower prices, and to an extent that is certainly a positive. But when lower prices do not stir higher demand, it is clear that lower inflation is a sign of trouble.

US Weekly Jobless Claims (13:30 GMT): The last update on the US labour market scheduled for release in 2012 will likely end the year without any fireworks. Economists overall are expecting a slight increase, and that is what my econometric models tell me, too. Treading water is not going to impress anyone, but at this point no change is enough to support the forecast that the labour market will remain on its slow-growth path as the new year begins.

A surprisingly high number in today's report—anything above, say, 375,000—would threaten a rosy outlook, but recent numbers suggest that is a low probability for today's release. New filings for unemployment benefits are again averaging just under 370,000 a week, on a seasonally adjusted basis for the trailing four weeks. That is the pace that prevailed before the late-October hurricane blew this leading payrolls indicator skyward. Another update that is more or less unchanged from the previous report would strengthen the case for expecting that the labour market is still making slow but steady progress.

US New Home Sales (15:00 GMT): New home sales slipped a bit in October, but that is probably a temporary pause. Today’s update for November will likely hold steady if not rise a bit, according to my econometric forecasts. Meantime, the market’s outlook anticipates 375,000 in new sales (annualised) for last month, based on the consensus prediction.

It is easy to rationalise a steady or modestly higher number for November once you consider that several key housing reports for the month have already been published and the news is encouraging. Housing starts slipped a bit in November, but new building permits ticked higher.

Meanwhile, sales and prices for existing homes continued to improve last month, the National Association of Realtors (NAR) advised last week. "Momentum continues to build in the housing market from growing jobs and a bursting out of household formation," NAR’s chief economist said.

Given the mostly upbeat news for November housing data that has been published to date, it would be surprising to see a retreat of any magnitude in today’s report for new home sales.