Robert Brusca

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<p><img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080310h.jpg" align="left" border="0" height="265" width="353"></p>
<p>Japan&#8217;s economy watcher&#8217;s index made a long awaited bounce in
February. The future conditions index rebounded most sharply.<span style=""> </span>The current conditions and current
employment indices each made soft rebounds as well. The future index is
now &#8216;only in the bottom 17<sup>th</sup> percentile of its
five year range instead of at the bottom. The overall economy watchers
index is only up to the bottom 7.1% of its range from the bottom.
Typically when the future index has been weak and makes a significant
rebound that rebound is meaningful. The rise in the various economy
watcher indices this month is encouraging. <span style=""></span></p>
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<th colspan="8" scope="col"><b>Japan
Economy Watchers Surveys</b> </th>
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<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="4">Raw readings of each survey</td>
<td colspan="3">Percent of 5Yr range*</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td><b>Feb-08</b></td>
<td><b>Jan-08</b></td>
<td><b>Dec-07</b></td>
<td><b>Nov-07</b></td>
<td><b>Feb-08</b></td>
<td><b>Jan-08</b></td>
<td><b>Dec-07</b></td>
</tr>
<tr class="grey2">
<td class="firstcol" colspan="8"><i>Diffusion</i></td>
</tr>
<tr>
<td class="firstcol"><b>Economy Watchers</b></td>
<td>33.6</td>
<td>31.8</td>
<td>36.6</td>
<td>38.8</td>
<td>7.1%</td>
<td>0.0%</td>
<td>5.0%</td>
</tr>
<tr>
<td class="firstcol">Employment</td>
<td>35.0</td>
<td>34.1</td>
<td>37.5</td>
<td>41.9</td>
<td>2.8%</td>
<td>0.0%</td>
<td>0.0%</td>
</tr>
<tr>
<td class="firstcol">Future</td>
<td>39.5</td>
<td>35.8</td>
<td>37.0</td>
<td>38.8</td>
<td>17.8%</td>
<td>0.0%</td>
<td>1.5%</td>
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Japan’s economy watcher’s index made a long awaited bounce in February. The future conditions index rebounded most sharply. The current conditions and current employment indices each made soft rebounds as well. The future index is now [...]

Economy Watchers Index Rebounds

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Tom Moeller

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The **Industrial Materials Price Index** from the Foundation for International Business and Economic Research (FIBER) declined 0.5% (+2.5% y/y) during the latest four-week period, after rising 0.7% in the prior four weeks. It was the first decline since early-May and accompanied a sideways movement in factory sector production.

**Crude Oil & Benzene** group prices moved 1.6% lower (-11.2% y/y) in the latest four week period. The cost of West Texas Intermediate crude oil declined 3.3% to $65.39 per barrel and remained 11.9% lower y/y. It had fallen to a low of $58.50 per barrel in the second week of May. The cost of the petrol-chemical benzene, used for making plastics & synthetic fibers, weakened 1.9% (-30.8% y/y). Excluding crude oil, the industrial commodity price index eased 0.3% (+3.4% y/y) during the last four weeks.

Prices in the **Metals** group, prices fell 1.0% (+6.2% y/y) over the most recent four weeks. Lead prices declined 4.7% (+0.4% y/y) while copper scrap prices weakened 3.0% (+9.9% y/y). Aluminum prices slipped 0.3% in four weeks (+17.3% y/y), and tin prices fell 0.7% (+12.5% y/y). Working higher, the cost of zinc rose 2.2% (7.8% y/y), and steel scrap costs gained 1.3% (-7.7% y/y) over four weeks.

**Miscellaneous** group prices were little changed (+6.6% y/y) in the latest four week period. The price of natural rubber fell 7.4% (-11.4% y/y) in four weeks, but framing lumber prices gained 5.8% (33.6% y/y). Tallow costs (used in the soap industry) rose 2.4% (32.5% y/y) in four weeks.

Prices in the **Textile** group edged 0.1% higher (2.3% y/y) during the last four weeks. Burlap costs improved 3.6% in four weeks (3.1% y/y), but cotton prices fell 1.6% (+5.9% y/y) in that same period.

The Foundation for International Business and Economic Research (FIBER) develops economic measurement techniques as applied to business cycles and inflation in the U.S. and other market economies. The commodity price data can be found in Haver's **DAILY**, **WEEKLY**, **USECON** and **CMDTY** databases.

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- Decline is first in three months.
- Crude oil and metals prices move lower.
- Lumber prices improve while textile costs steady.

FIBER: Industrial Commodity Prices Retreat in Latest Four Weeks

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As more updated inflation data continue to post, we can look back at EMU historic inflation performance and try to gain some perspective. Since the euro area went to single currency status and set a program in motion for replacing domestic currencies (whose exchange rates were by then locked) with the euro-currency unit, there has been a lot of shifting of inflation and in relative prices among members. In the early days, there was a lot of concern about that and about entry level inflation commitments in the community.

On a to-date basis, despite the recent loss of control over inflation (in the wake of COVID and the Russian invasion of Ukraine) which the ECB has now mostly – but not fully- contained, core inflation in the EMU still runs hot and does so somewhat broadly. Still, headline inflation in the euro area has run at a compounded annual rate of 2.1% since January 1999, very close to its original 2% commitment.

Current headline inflation rates among early reporting and early EMU members (11-countries) show year-on-year inflation at 2.4% or higher in six of them- highest at 3.5% in Austria.

Since currencies were bound together and blended into the euro in January 1999, price levels among these members have risen in differing magnitudes, ranging from 92% in Luxembourg to 63% in France. That leaves a lot of potential for competitiveness gaps between those countries depending on the industries that most responsible for the price-level rise differences.

Price levels have risen more slowly than for the EMU overall in France, Finland, Ireland, Germany, and Italy. When the EMU was first being implemented, there were massive and chronic inflation differences between hard money countries like Germany, the Netherlands, Finland and a few others. The Mediterranean countries including France, Spain, Portugal, Italy, and Greece had typically run much higher rates of inflation. However, after over a quarter century in the cauldron of monetary singularity, we find that Spain and Portugal have averaged inflation rates of 2.4% and 2.2% while the EMU has averaged a pace of 2.1% during the period. Italy has averaged 2.1%. These are tightly clustered results.

The Monetary Union has had its difficulties, its tensions, its debt crises, and has withstood an influx of migrate that created tensions in the area (an influx that cost former EU member the U.K. its membership). But in the end, current inflation rates are mostly in alignment and so do not seem to display much more variation that the sorts of inflation rate difference you see among various states within the United States. The worst start-to-date inflation performance is in Luxembourg at 2.5% -and that probably matters the least since it is a financial center and does not compete much in manufacturing.

The far-right hand column in the table ‘memorializes’ history by showing the largest divergence between German inflation and each member over this history back to 1999. The current largest one-year inflation rate gap with Germany is Austria at 1.5% but after that it is Spain at 0.6% and then Portugal, Luxembourg, and Belgium -all at 0.5%. These gaps bear no relationship to the historic annual discrepancies as large as 28%. Four countries have their largest discrepancy with Germany annual inflation at over 20%; the others are greater than 15% but less than 20%.

For reference, I include the United States and the United Kingdom at the bottom of the table. They are two peas-in-a-pod with aggregate price levels rising over 90% each over this period. We can see the impact of that on the dollar’s value as well as on the value of the pound sterling over this period. If exchange rates are locked (as in the EMU), domestic prices are forced to rationalize themselves in the domestic economy. If exchange rates are left to fluctuate, the pressure on the domestic price level to adjust is alleviated because the exchange rate can adjust instead. Forcing adjustments in prices through a domestic chain of events is usually more painful than undergoing exchange rate change and, the later, simply change all prices in unison at least those for tradeable goods.

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The bottom line is that the euro area has been a successful endeavor but not without bumps in the road and events that tested the commitments of members to the arrangement. But now it is still standing and economic trade among members is smoothed and occurring on a more level playing field- good for competition and good for everyone. Political separation is still a feature among members and fiscal policies remain independent – but with rules. There is no denying a world of progress has occurred, especially in integrating the formerly high inflation Mediterranean countries into a low inflation economic area.

Europe

Inflation: Better-Contained in EMU - Part of Along Road of Progress

Tian Yong Woon

This week, we look at key economic and trade developments across Asia amid persistent geopolitical tensions and shifting policies. US-India trade talks, once expected to produce a quick deal, have stalled. India now faces up to 50% additional US tariffs—half from revised reciprocal rates and half linked to its continued imports of Russian oil, which make up about 35% of its crude supply (chart 1). Around 20% of India’s exports go to the US, leaving its economy exposed to the impact of these measures. In China, a flurry of economic data releases for July will provide a comprehensive update. Despite resilient numbers of late, doubts persist about the sustainability of growth. Recent retail sales gains have been partly fuelled by a government subsidy program, which is likely a one-off, while the property market continues its multi-year decline. Export growth has endured (chart 2), but largely supported by importers’ front-loading ahead of tariffs,an effect that’s likely to be temporary. The US-China tariff pause may be extended, though talks remain ongoing, and risks of renewed tensions persist. Meanwhile, China’s trade surplus continues to expand as exports shift toward Africa, Southeast Asia, and Europe (chart 3).

On the region’s growth backdrop, Japan’s preliminary Q2 GDP reading and final Q2 figures from Taiwan, Hong Kong, and Malaysia are due. Taiwan’s preliminary Q2 GDP shined, boosted by AI-driven exports (chart 4), while Hong Kong and Malaysia have been treading water. Japan has faced export headwinds from US tariffs, particularly in autos, though recent US-Japan and US-Korea deals reducing auto tariffs may support future growth (chart 5). Monetary policy watchers will focus on the Reserve Bank of Australia, expected to cut rates but signal an end to easing, and the Bank of Thailand, likely to cut rates amid deflation risks (chart 6).

**The US-India furore**
The trajectory of US-India trade talks has not unfolded as initially expected. At one point, these negotiations were considered among the most likely to yield an early deal. However, that has not materialized. In fact, India now appears to be in a potentially worse position than it was around its Liberation Day period, as it faces the prospect of up to 50% in additional US tariffs. Of that, 25% stems from the revised reciprocal tariff rate from the US, while the remaining 25% is linked to India’s continued purchases of Russian oil. India has thus found itself in a bind: on the one hand, it is under pressure to reduce imports of Russian oil—which have grown about 35% of its total crude oil imports, as shown in chart 1—while on the other, its exports to the US, which now make up roughly 20% of its total exports, could be seriously harmed by US tariff measures.

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**The China docket**
In China, July data on retail sales, industrial production, fixed asset investment, house prices, and unemployment are all scheduled for release this week, offering a comprehensive update on the state of the world’s second-largest economy. Despite a recent run of seemingly resilient figures, there remain valid reasons for caution and doubts about the sustainability of this momentum. While government and monetary support measures have undoubtedly helped prop up growth, they can only do so much—and only for so long—without structural reforms to address underlying issues. For example, recent retail sales data have often exceeded expectations, but much of that strength has been driven by the government’s durable goods subsidy program. These effects are likely to be one-off, and with budget allocations for such subsidies capped, the retail sales bounce may soon fade in the absence of deeper, structural improvements in China’s consumer base. Persistent weaknesses also remain in other sectors—most notably the property market, where prices have continued to fall, extending a multi-year downtrend. In trade, export growth has held up, as shown in chart 2, despite US tariff measures. However, much of this resilience has stemmed from importers’ precautionary front-loading ahead of potential tariff hikes—an effect that is likely temporary and could soon fade.

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Adding to the discussion on China’s trade situation, while an extension of the US-China tariff pause appears likely (talks are still ongoing) there remains a tail risk of renewed escalation in trade tensions, an outcome that would clearly weigh on the global economy. Nonetheless, the first round of (now-paused) mutual tariffs had already triggered some degree of trade rebalancing, with the US-China trade deficit even narrowing during the current pause. However, China’s overall trade surplus continues to expand, suggesting it may be redirecting exports to other markets such as Africa, Southeast Asia, or Europe, as shown in chart 3—or potentially re-routing trade flows altogether.

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**GDP releases ahead**
Apart from developments in China and the ongoing US-India trade furore, the week is packed with GDP releases—most notably the preliminary reading for Japan (discussed below) and final readings for Taiwan, Hong Kong, and Malaysia. Broadly speaking, while Q2 data will capture part of the impact from the US’s first round of reciprocal tariffs and the subsequent pause, the effects of the updated tariffs—mostly higher than the prior pause rate of 10%—are of arguably greater concern and will only be captured in later data prints. These new rates, announced recently by the US, took effect on August 7. Preliminary Q2 GDP figures for Taiwan have already shown stellar results (chart 4), driven by export strength linked to the ongoing AI boom, while growth in Hong Kong and Malaysia has continued to tread water.

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Turning next to Japan, the economy—like many other export-driven Asian markets—has recently felt the weight of US tariffs, which have significantly dampened growth by reducing export volumes, particularly in the automotive sector. These tariffs created headwinds that slowed Japan’s export performance and constrained overall economic momentum (chart 5). However, the recent US-Japan and US-Korea trade agreements, which include reductions in auto tariffs, may provide some relief and bolster future growth. That said, it’s important to note that the positive effects of these tariff reductions will not be reflected in Japan’s preliminary Q2 GDP figures, scheduled for release later this week.

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**Central bank releases ahead**
Monetary policy decisions from the Reserve Bank of Australia (RBA) and the Bank of Thailand are also in focus this week. The RBA is widely expected to deliver another rate cut while signalling a likely end to its easing cycle, balancing the risk of resurgent inflation against the continued need to support growth. Meanwhile, a rate cut by the Bank of Thailand has become increasingly likely, following the latest inflation data that showed a deeper dive into deflation (chart 6). This weak price and demand environment may compel the central bank to ease further to bolster growth. Regardless of what happens before October, markets anticipate that the Bank of Thailand will adopt a dovish stance once incoming Governor Vitai—known for his pro-easing views—assumes leadership.

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Asia

Economic Letter from Asia: Trade-Offs

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Consumer credit outstanding increased $7.4 billion (2.1% y/y) during June after rising an unrevised $5.1 billion in May, and strengthening $16.4 billion in April, revised from $16.9 billion. A $9.0 billion June rise had been expected in the Action Economics Forecast Survey. As a percentage of disposable personal income, consumer credit of 22.4% in June compared to 22.5% in May and 22.9% one year earlier. It reached a high of 26.4% during all of 2017. The figures are reported by the Federal Reserve Board.

Nonrevolving credit outstanding rose $8.4 billion (1.9% y/y) during June after rising $8.9 billion in May, revised from $8.6 billion and an unrevised $9.4 billion in April. Nonrevolving credit held by depository institutions declined 6.8% y/y in June after falling 7.2% y/y in May. Finance company debt holdings eased 0.4% y/y after slipping 0.2% y/y in May, while credit union holdings rose 11.2% y/y in June after a 10.8% y/y May strengthening. Nonrevolving debt of the federal government rose 4.1% y/y in June following a 4.0% y/y rise in May.

In June, revolving credit outstanding, which includes credit cards, fell $1.0 billion (+2.5% y/y) after declining $3.8 billion in May, revised from -$3.5 billion and rising 7.0 billion in April, revised from $7.5 billion. Revolving credit outstanding held by depository institutions fell a steady 2.9% y/y. Revolving credit held by finance companies fell 15.0% y/y after a 14.3% y/y drop in May, while credit union debt rose a fairly steady 4.1% y/y in June.

In Q2’25, student loans rose $8.2 billion (4.2% y/y) while motor loans increased $5.1 billion (0.3% y/y).

The consumer credit figures from the Federal Reserve Board are break-adjusted and calculated by Haver Analytics. The breaks in the series in 2005, 2010 and 2015 are the result of the incorporation of data from the Census and the Survey of Finance Companies, as well as changes in the seasonal adjustment methodology. The consumer credit data are available in Haver’s **USECON** database. The Action Economics forecast figures are contained in the **AS1REPNA** database.

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- Moderate increases in last two months follow strong April gain.
- Nonrevolving credit usage strengthens as revolving credit eases.

Economy Watchers Index Rebounds

Summary

Robert Brusca

More Economy in Brief

FIBER: Industrial Commodity Prices Retreat in Latest Four Weeks

Inflation: Better-Contained in EMU - Part of Along Road of Progress

Economic Letter from Asia: Trade-Offs

U.S. Consumer Credit Picks Up in June

Japan Economy Watchers Surveys
	Raw readings of each survey				Percent of 5Yr range*
	Feb-08	Jan-08	Dec-07	Nov-07	Feb-08	Jan-08	Dec-07
Diffusion
Economy Watchers	33.6	31.8	36.6	38.8	7.1%	0.0%	5.0%
Employment	35.0	34.1	37.5	41.9	2.8%	0.0%	0.0%
Future	39.5	35.8	37.0	38.8	17.8%	0.0%	1.5%