Economy in Brief

The Economic Situation: This month the ZEW series from German financial experts shows improving economic situations. Two of the four featured economies improve: the euro area improves to a reading of -21.5 in August from -37.7 in July, and the German economy advances to -61.1 from -77.6. The U.S. worsens to a reading of 12.9 in August from 14.9 in July, and the Chinese assessment is nearly unchanged at -25.1 in August compared to -25.2 in July. Apart from these diffusion readings and quite different from the diffusion readings is the Chinese ranking in a top position with a 73.8 percentile standing. The euro area has a 56.6 percentile standing. The U.S. has a 41.7 percentile standing. Germany has a 30.9 percentile standing. Only China and the euro area have standings above the 50th mark, which place them above their historic medians for their respective periods.

Macroeconomic expectations: Macroeconomic expectations are provided for the country-level readings for Germany, the U.S., and China. All three countries make an improvement in August, with the largest improvement coming from Germany and the smallest improvement coming in China. The standings show that, in terms of macroeconomic expectations, Germany’s economy has a 58.8 percentile standing, the U.S. has a 48.2 percentile standing, close to its median but below it, and China has a 41.5 percentile standing.

Inflation expectations: The inflation expectations poll in August compared to July shows all countries with a drop off, including large drop-offs, in inflation concerns. Euro area expectations fall to 2.4 in August from 10.4 in July. In Germany, that expectation falls to a net diffusion reading of 1.8 from 14.9 in July. There is a sizeable drop off in China too, which logs 5.3 in August compared to 12.9 in July. The U.S. improvement is smaller at 11.8, down from 15.0 in July. While the diffusion readings are different across these countries, the percentile standings are fairly similar. The euro area, Germany, and China all have percentile standings in the range of roughly 36th to 38th percentile, while the U.S. percentile standing is lower at its 26th percentile. Despite what we are seeing in markets, the ZEW experts are undeterred in their inflation outlooks.

Expectations for short-term rates: Short-term interest rate expectations don't change in the euro area. There is some further backing off in the U.S. and substantial downshifting in China where there's a sign change to -2.1 in August from plus 8.8 in July. In August, the euro area has a nearly 80th percentile standing for its diffusion value. The U.S. has a slightly below-median 48th percentile standing, and China has a slightly above median standing at its 52nd percentile.

Long-term rates moderate: Long-term interest rate expectations show some moderation in August to pair with moderate queue standings. Germany falls to 24.2 in August from 27.7 in July, the U.S. steps back to 27.7 from 30.8 in July, and China backs down to a diffusion value of 12.3 from 17.0 in July. Germany and the U.S. have rankings around their 33rd percentile mark, while China has a ranking around its 55th percentile mark. Despite the lower diffusion reading, Chinese long-term rate expectations are high relative to historic experience in relation to the U.S. and Germany.

Upbeat on Stocks: One interesting feature is the positive outlook on stocks in August, with all four responding areas, the euro area, Germany, the U.S., and China, logging diffusion values close to 40. These are up from readings that were bunched around the 20 to 25 diffusion mark in July. Despite the clustering of the diffusion values, the queue percentile standings vary quite a lot. For China, the current reading, which is the weakest diffusion reading for stocks in the table of the four, has a 92.3 percentile standing. The U.S. has a 74.4 percentile standing, and the euro area has a 59.3 percentile standing. Germany has the lowest percentile standing, just below its median at a 49.7 percentile mark.

Japan's industrial production was revised up to show a 2.2% gain in June after falling by 0.5% in May. Industrial production in Japan is accelerating, showing a 2.5% growth rate over 12 months, a 7.9% annual rate over six months, rising to a 9.8% annual rate over three months. Manufacturing is accelerating in step with the total industry measure.

Key industries like textiles and transportation show acceleration underway or something close to it. In the case of transportation equipment, a 6.4% growth rate over 12 months rises to 14.7% over six months, although it steps back to a 12% growth rate over three months. That's still a great acceleration over its growth rate for the full 12 months, doubling that pace.

Japan's mining industry shows all negative numbers, with declines in each of the last three months and with sequential growth rates showing sharper and faster declines in output over shorter periods.

Utilities delivering gas and electric services showed a sharp decline of 4.7% in June. Sequential growth rates for this sector are negative as well but equivocally decelerating. We see a -7.1% pace over 12 months, which improves to -6.4% over 6 months, and then worsens sharply to a -14.4% annualized rate over three months.

The just-ended quarter (quarter-to-date) shows industrial production up 2.4%, with manufacturing up only 0.8%, both at annual rates. Consumer goods output is up with a sharp 5.4% annual rate in the quarter, and intermediate goods output is up by 1.2%. Investment goods output is declining at a 1.1% annual rate, and mining is falling at a 16.5% annual rate. Electricity and gas utilities show growth rates in the quarter as negative as well.

Japan has had a difficult run since COVID struck. All of the industry breakdowns in the table show declines compared to their levels of activity in January 2020, five and a half years ago. That is stunning and widespread weakness. The economy is adapting. Manufacturing is showing some encouraging acceleration over the past year despite challenges aided by yen weakness. Global conditions are still touch-and-go with such high oil prices and turbulent conditions in the Middle East.

Industrial production in the euro area was flat in June, interrupting a four-month string of increases that had been in place. Despite the flatness and the decline in manufacturing output in the month, trends still show that output is on an expanding path. Consumer goods output was particularly strong in June, up 2.7% month-to-month, led by a 3% increase in nondurable goods output. However, intermediate goods output fell by 0.8%, and capital goods output fell by 1.4%. Growth is a matter for the weighting-game more than a statement about breadth.

The sequential calculations that give us a look at trend show that output is accelerating overall, barely growing at a 0.1% pace over 12 months, edging up to a 0.6% annual rate over six months, and culminating at a 2.5% annual rate over three months. Manufacturing output similarly has a slow start but builds a head of steam to grow at a 2% pace over three months. Consumer goods output ramps up very sharply. Although it declines by 0.8% over 12 months, over three months it is up at a 38.3% annual rate, led by strong expansion in consumer nondurables with output surging at a 43.9% annual rate over three months. However, consumer durable goods are still lagging, with output falling by 2.7% over 12 months, although it is rebounding at a 1.8% annual rate over three months.

The story across countries is varied with many European economies showing output declines in June. Of the 14 early-reporting European economies in June, nine showed declines in output in the month. For individual European economies, Germany and Spain are on accelerating paths, while Italy, Luxembourg, and Greece are posting decelerating output patterns.

In the quarter to date, output is rising for most industrial categories across the monetary union. The exception is consumer durables, the only category showing a decline on a quarterly basis with the second-quarter results now in. Manufacturing output is up at a 4.6% annual rate in the quarter. Consumer goods output is up to a 12.3% annual rate. Intermediate goods output is up at a 4.2% annual rate, and capital goods output is advancing at a 3.4% annual rate. Of the 14 European countries summarized in the table, Austria, Malta, Greece, and Portugal are the only countries showing quarter-to-date declines in the second quarter.

For the most part, these readings are upbeat, showing acceleration in most of the overall European manufacturing categories. However, when we evaluate annual growth rates compared to historic norms, all of the industrial categories for the monetary union are below their historic medians except for intermediate goods output. Across the European economies reporting in this table, only five have output speeds taking them above their historic medians. Those are Finland, Italy, the Netherlands, Spain, and Greece. All the rest of the reporters are below the 50% mark. The median ranking across the monetary union economies is at its 44.5 percentile.