Italian Confidence Follows Up on Its Spurt

Italian business and consumer confidence improved in July. Both series- with special emphasis on the consumer series- increased sharply in June and have followed that up with another gain in July. That improvement continues in July albeit at a reduced pace. Despite the strong jump in June and the continued rise in July, Italian consumer and business confidence remain low in their respective historic ranges.

Expressed as the standing in their respective historic queues consumer confidence is nearly up to the 19th percentile of its queue meaning it is weaker than this only 19% of the time and stronger more than 80% of the time. Business confidence is up to nearly the 17th percentile of its queue implying that it is weaker only about 17% of the time and stronger about 83% of the time. Despite what are significant increases in consumer and business confidence Italian consumer and business attitudes are still extremely week by historic standards.

Business confidence has averaged 88.8 in terms of its index over the last 12 months and currently stands above that at 91.7. Order book ratings have averaged a -41.8 standing and currently are stronger and a -37 standing. However, that -37 standing leaves overall order books also in the lower 17th percentile of their historic queue. Export orders are faring much better. There, the 12-month average is at -30.4 whereas in July that has improved to -19, with much of that improvement having occurred actually in June. The -19 standing is in the 54th percentile of its historic queue leaving it above the midpoint of its queue (back to 1996). This is impressively robust compared to the other standings of business confidence metrics. Inventories at zero compare with 12 month average of 0.5 and stand in the 24th percentile of their historic queue, implying that they are weaker only about 24% of the time.

Perspective on these readings- The world economy is still a relatively weak place and the Italian economy, in particular, has been under great deal of stress as well as political upheaval. When we compare demand conditions overall to demand conditions in overseas markets and find that orders from foreign markets are faring much better than orders from all sources (including domestically), it is partly an indictment of the weakness of the domestic economy. However since foreign orders are above the midpoint of their historic range this is evidence of something in the international arena that has improved even though the euro-Zone as a whole remains pressured and global demand continues to be challenged. Italy's domestic market is in worse shape than it its export market.

Italy's domestic metrics do produce some surprising results from its consumer survey. Although the last 12 months the overall situation is assessed to be weaker only about 13% of the time, looking ahead to the next 12 months the overall situation, as it is assessed today, has had a weaker assessment 96% of the time. In other words it is been stronger only about 4% of the time which is an astonishingly strong reading given the current state of the Italian economy and the difficulties that surround it. It's hard to fathom what it is about the overall situation that has consumers thinking it is so greatly improved; but when you look at this metric since 1996 and is only been stronger about 4% of the time. That's a factual calculation- and a surprising one.

The strong outlook for the next 12-months belies the elevated reading for expected unemployment which is lower only about two-thirds of the time and higher only about one third of the time. Although the 'expected' over situation is rated very highly Italian workers still have palpable concerns about their possibility of becoming unemployed.

Consumers' assessments of their budgets are also very weak. The household budget is gauged to be weaker than this only about 7% of the time. And, when we look at planned purchases, the constructed index for planned purchases has never been weaker than its current level since 1996. So whatever optimism is percolating in the minds of the Italian consumer's in responding to the survey it certainly is not giving a very high weight some of the traditional metrics that we would use to assess consumer optimism. As is common with a survey like this, when planned purchases are low generally the savings environment is rated much higher and that's the case this month. The savings reading resides at about the 60th percentile of its range implying that it's higher only 40% of the time and lower 60% of the time a moderately favorable environment for planned savings.

Comparing planned future spending and future savings to what are called current savings and purchases we see that current savings are assessed even higher, in the 73rd percentile of their historic queue implying that they are higher only about a quarter of the time; major purchases are weak, as expected, standing in the 37th percentile of their queue but that only means they are weaker 37% of the time which is much stronger than the planned (future) purchase index which is on its all-time (since 1996) low.

We've seen some evidence of improved sentiment in Italy from some of its other gauges as well. It's probably true that consumer responses are mixing in some of the information about reduced austerity pressures, its political changes and its economic fortunes when they respond to the survey. It's expected that in the European Monetary Union the pressure for continued austerity is going to be substantially alleviated.

While some of the components of Italy's consumer confidence index from ISAE may be a little hard to swallow, the main the index continues to be extremely weak. When we look at some of the improvement from some of the other indices coming from other European Monetary Union members it's important to keep in mind that while we have seen some stirring in some very weak readings, many of them continue to be still-weak readings. And that continues to be the main story out of Italy. Reported today, was that Italian wages were up 1.5% year-over-year, a small improvement from last month's 1.4% gain; even though inflation has been relatively tamer that's thin gruel for optimism. Be careful what you read into this report. There is some good news here but still not a lot of it.