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Economy in Brief

ZEW Expectations Are Set Back As the Current Index Surges
by Robert Brusca  April 21, 2015

The ZEW expectations index was set back unexpectedly in April as it backtracked to 53.3 from March's 54.8. But at the same time the current index moved sharply higher. The one month rise in the current index is the fifth largest one-month gain since 1995. The current index has been moving up very sharply, in fact, its three-month gain is the fifth largest since late 1995.

Any preoccupation with the small setback in the expectations index seems out of place. Expectations are formed relative to where the economy is. Since the current position of the economy has been moving higher, that would put greater strains on the ability of expectations to continue to see further advances.

At its April level, the current index has been higher only 8% of the time while expectations index has been higher 28% of the time. The current index is relatively stronger in the sense of its position in its historic range and it is appropriate that expectations for the future would begin to trim back as current economic performance is evaluated as some of the best ever. After all, how long can an economy continue to operate at the top of its game?

Against this background we are much less disturbed by the survey results from the ZEW financial experts and see the monthly backtrack as something that is wholly appropriate.

In this month's assessment, the evaluation of corporate earnings potential has improved to its third strongest reading in 18 months. The evaluation of the bond market is tied for its best in the last 74 months. Among 13 sectors evaluated, earnings expectations are improved month-to-month in five of them: utilities, construction, consumption/trade, steel/metals, and chemicals/pharma. The evaluation of the vehicles sector is weaker coming off its highest reading ever last month. Electronics and machinery, while lower on the month, still have extremely high earnings expectations.

On balance, the ZEW officials tell us that a number of industries are doing quite well and that the current environment is excellent. Against this background, some small setback in the expectations reading hardly seems to be the real news of this report.

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