Chicago Purchasing Managers' Barometer Slightly Improved

The Chicago Purchasing Manager's Association reported that its June business barometer improved, for the fifth straight month, to a still low level of 49.6 from 49.1 in May. Consensus expectations had been for weaker reading of 48.0.

During the last ten years there has been a 67% correlation between the index and the three-month change in US factory sector industrial production. There has been an 85% correlation between the Chicago figure and the national ISM index (due for release tomorrow) and that is the highest correlation of all the regional series with the national ISM index.

The components of the overall index had varying performance. To the upside was the employment index which rose to 46.7, the highest level since January. Also up were the inventories and vendor deliveries components.

To the downside was the production component to the lowest level since early 2002. Also down slightly were the new orders and the orders backlog components.

The prices paid index dipped slightly 85.5 which was still near the recent highs. During the last ten years there has been a 48% correlation between the price index and the three-month change in the finished goods PPI.

Last week's speech titled Global Economic Integration and Decoupling by Federal Reserve Vice Chairman Donald L. Kohn can be found here.

The minutes to the Fed meetings held on March 14 and 16, regarding Bear Stearns, are available here and here.

Consumer confidence in the U. K. has declined by 5 percentage points in each of the last three months and is now -34%, one point short of the lowest value recorded in March, 1990 as shown in the first chart. Consumer confidence in the U. K. is measured by the market research firm, GfK NOP. The measure is the percent balance between those who view current economic and financial conditions and prospects positively and those who view them negatively.

The decline in consumer confidence is no surprise. Consumers in the U.K., like those in many other countries, have been buffeted by rising inflation, slowing growth in jobs, declining house prices, foreclosures, and so on. There does not appear to be much, if any, relief in sight. The Hometrack Housing Survey, also released today, showed that house prices declined another 1% in June. They are now 5,800 GBP lower than in September 2007, as can be seen in the second chart.The Hometrack house price is mix adjusted, that is, the relative weight given to each characteristic of the house remains the same from one period to another. It is an attempt to measure the change in the price of a specific house from one period to the next. It is notthe change in average price of all houses sold.

The EMU HICP is now over 4% Yr/Yr. this is not a good result for a central bank that has set a ceiling of 2% for headline inflation. It is also running at a pace of just over 4% over three-months and six-months. No detail of prices is yet available and only Germany and Italy have released public figures for June. The good news is that neither Italy nor Germany show accelerating trends in headline inflation. Their sequential growth rates are either mixed or pointing lower. But at 4% Yr/Yr Italian inflation is high and a 3.6% Yr/Yr German inflation, usually one of the lowest in the zone, is also high.

The ECB has an emerging credibility problem that will probably force its hand on a rate hike. But one as to wonder the usefulness of a target that is breached so baldy it has been doubled. While critics can pick at the Fed’s choice of the core rate to ‘monitor’ it has set out parameters for that rate’s range that US inflation still lies within. The core is contained even as headline inflation in the US surges over 4%. The Fed can claim victory but many don’t want to acknowledge it.

Europe has a policy credibility issue inflation has been above the ECB’s ceiling for far too along. In the US inflation is within the Fed’s boundaries but it is the Fed choice of boundaries that is a matter of debate concerning policy integrity. Central banks are having all sorts of issues maintaining their standing despite the success in holding core inflation low.

Still the fact is…
When oil prices flare so sharply, it is impossible to cushion the impact on inflation in the short run. The ECB thus has a credibility problem since its sole pledge is on headline inflation. It has not offered any cogent statement on inflation or an alternative to headline and has not suggested anything other than that inflation as it is remains unacceptable. Energy inflation is something special, since if the central bank can hold its impact on core inflation at bay it will also produce deflationary effects. No central banks gets good marks for their public relations stance in dealing with this issue in this cycle despite having had prior experience with energy inflation.