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Economy in Brief

Economy Watchers Survey Points to a Return to Normalcy- Will It Happen?
by Robert Brusca  October 8, 2021

Both current and outlook gauges improve!
Japan's economy watchers index moved higher in September as the outlook index moved even more sharply higher. Perhaps signs that latest pandemic wave is cresting across larger Western economies is starting to have a positive impact on future assessments. The current and future indexes in September both show broad improvement with each index logging month-to-month improvement for each sub-index compared to the month before. That is not quite the slam dunk for optimism it might seem to be since the current index showed all sub-indexes declining in August and all but one of the future indexes fell month-to-month in August as well. Recovering broadly from that weakness is not necessarily a sign of strength. It is good news but how good? Is it remedial news or more than that?

Current and outlook surveys reach a fork in the road
In assessing the 'nature of this rebound' is where the similarity begins to break down between the current and the outlook indexes. The current index may be broadly stronger month-to-month, but its sector sub-indexes are still weaker than they were in July before the onset of August weakness. On the other hand, the outlook index is stronger than its August values for the headline reading as well as for all the sub-indexes.

The headline current index has only a 23.5-queue percentile standing while the headline outlook index has a very strong 97.8-queue percentile standing. The outlook readings are extremely positive and encouraging.

A return to normalcy?
The outlook index is also broadly higher over 12 months. The headline for this metric and the readings of all sub-indexes are higher on balance over 12 months. By comparison, the current index and its components are broadly lower over 12 months with only one sub-index in the current framework higher over 12 months. Moreover, ranking the future and the current indexes produces a nearly inverse result. The Spearman's Rho ranking correlation between the rankings of the current headline and sub-indexes vs. the future headline and sub-indexes is -0.90. The Spearman's gauge is a correlation coefficient for ranked data. It tells us that not only are current data broadly lower and future indexes broadly higher over 12 months but that the indexes with the most weakness in the current form also tend to have the strongest readings over for the future index. That means the future index is pointing to not just growth but a rebound and reversal of past weakness or, in other words, much more of a return to normalcy.

The rich get poorer, and poor get richer!
For example, over 12 months the weakest current gauges are eating & drinking places and services. For the future index, those two industries are tied for the strongest readings. Also, the strongest current readings over the past 12 months are for housing and in manufacturing. The outlook for housing and manufacturing rank 10th and 9th respectively in terms of the outlook.

Additionally, if we rank the 12-month changes in the index values under the future and the current gauges and rank industries in each scheme according the 12-month changes, there is a mild negative correlation implying that what was strong will become weak and vice versa. This also is a result that points the way to a return to normalcy. Eating & drinking places rank 10th in terms of the sector's 12-month change in the current index with services ranking 9th. The future index ranks the 12-month changes for these sectors as 2nd and 3rd, respectively. However, not all rankings are inverse. Employment ranks first in its 12-month gain in the current index and first in the 12-month change of the future index. Employment has been increasing sharply and that is expected to continue, but this time involving some different sectors.

The rankings, of course, hint at this return to normalcy with sub-sector rankings in the current index averaging 28.3% well below their historic median standing and the future sub-sector index standings averaging 89.9%.

How upbeat the outlook?
Clearly the outlook is upbeat. But how upbeat? Historically there are only two future reading episodes (four observations in all) with higher readings than the future reading presented in the September 2021 report. The most recent episode was October and November of 2013; an earlier occasion occurred in December 2005 and in January 2006.

Covid and supply chain issues still linger...
The global economy is still in the grip of Covid and developing countries have not had much of a chance to acquire immunity from vaccination. Supply chain issues continue to hold back growth and delay the creation of output. In many cases, these supply chain and Covid issues are related as sourcing in developing countries that are using lockdowns to fight the spread (since they do not have vaccination) is contributing to a worsening of supply chain problems. It would be 'enlightened self-interest' for the developed countries to send more vaccine to the developing world, both to help them and to help unclog supply chains. In time, these issues are resolvable. But in the wake (indeed, in the midst of the wave) of the pandemic, it also seems like supply chain dynamics are going to change. Firms will seek safer, more secure, and more robust supply chain solutions instead of just the cheapest solution.

The man in the street is very upbeat
For now, Japan is upbeat that we are surfing the downside of a Covid wave and that that will continue. Japan also seems less worried about supply chain issues being a great problem. And with China, Japan's largest trading partner having a rocky go of it, the economy watchers poll seems unconcerned about new challenges arising there. China has stock market problems with property developers in default, and power problems across the board as energy is in short supply in the wake of certain 'green' promises made. Japanese survey contributors seem unfazed by any of this. But the nature of this survey is to poll the man-in-the-street- not the man in the ivory tower- for his or her views. These views, at the moment, are upbeat. But we can still see risks aplenty on the horizon. Most interesting among the Japanese survey results is this notion that the sectors with the weakest current reading are expected to be rebounding the most. This result would imply much more of a return to normalcy than we have seen so far. Will it come to pass?

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