U.S. Personal Income About On Forecast, Core Prices Again Up 0.1%

For private industry workers, the employment cost index rose an expected 0.9% last quarter. The gain followed a more modest 0.6% 1Q increase that was held back by a 0.3% decline in benefits costs.

Benefit costs rebounded 1.1% from the prior quarter’s move down. The cost of health benefits increased 4.8% y/y, continuing the slowdown of the last four years.

Wage and salary growth at 0.8% was lower than the 1.1% the prior quarter but the y/y growth of 3.4% was near the strongest of the last five years. Wages account for roughly 70% of the compensation index.

Even as the overall EU index of sentiment stays at a high level, its 12-month change is withering.

The EU retail index is relative the strongest this month as it resides in the top 4 percent of its range (96.3 percentile). The construction and industrial sectors also are in their 9th percentiles. Consumer confidence is lower than that, in the top 14 percent of its range, while the service sector is only in the top one-third of its range. Still, these are firm-to-strong readings.

But main country, Germany, is off for two months running. Italy has a string of declines. Spain is off for only the current month. France continues to show higher readings.

The overall industrial construction and services sectors gave back ground this month. Consumer confidence and retailing held firm.

Overall we must characterize the readings from this month as strong. But we offer the chart at the top as a reminder that once the rate of change begins to slip, this usually it is an authentic sign that the overall index is heading for a peak (this index already has done that) and then for some degree of slowdown.

In past peaking episodes the momentum measure peaked and fell off fairly rapidly. In this episode the loss of momentum is clearly more gradual. In previous cycles, the move from negative to positive back to negative momentum was usually executed more quickly than is the case in this cycle. That slower trajectory into negative momentum is a hopeful indicator. While the EU is sliding to a slower pace of growth, its rate of slowdown will be milder than in past episodes.

The main IFO gauges show that while the current readings for IFO are still very strong, the current indices are trending lower. As index numbers the index for expectations hit a bit of a ceiling and has formed what is essentially a double top. Expectations rarely get much stronger than an index reading of 105. The accompanying chart shows these indexes as percent changes and the downward slide of momentum is apparent.

Now, as the IFO gauges began to poster lower numbers, we look to see what the detail of the IFO report tells us about that step-back.

In terms of Y/Y percentage changes the current situation index continued to rise. However MFG is now lower Y/Y as it has been for two months running. Not shown in the table below is the detail for wholesaling which has fallen for the second straight month or construction, now off for three months in a row. Retailing is up in July after being off Yr/Yr in June.

Expectations are off across most main sectors with the MFG index off by 0.5% Yr/Yr and off on that basis for five of the past six months. Wholesaling expectations are off for one month in a row; retail is off for three months in a row and for five of the past six months.

Within MFG the overall sector shows a decline in activity Yr/Yr and that decline is seen in intermediate goods and consumer goods but capital goods activity rebounded in July after having made its first Y/Y drop in June.

Assessments of demand for MFG sectors are dropping in most sectors and have been dropping for five months more or less. The exception is the consumer sector where demand is seen as up in July; it was also up in May.

Also in MFG, orders on hand are somewhat mixed. The total is lower Y/r (-2.7%). But that is mostly weakness in intermediate goods since capital goods orders and consumer goods are still growing.

Foreign orders continue to grow, by 1.9% in all of MFG but intermediate orders are off. Foreign capital goods orders are up strongly but are slowing their rate of ascent; consumer goods orders are flat.

The outlook for three months ahead (bottom panel of table) is still mostly positive, but with some mixed trends. MFG export expectations are flat, despite good orders responses above. Orders expectations for retailing are on a long string of declines although the pace of decline is withering. Wholesale orders are positive but their strength is withering. Export expectations for three months ahead have turned flat for manufacturing in July. Employment expectations over the next three months do continue to be upbeat.

The German economy still is emitting a lot of very positive signals. However do not get lost in the high level of the indexes since they are also losing momentum. While retailing seems to be one improving sector its ability to offset slippage elsewhere has not been established.

French household confidence stumbled by three points taking the aggregate reading to its lowest point since April of this year. The overall index resides near mid range among all values since 1990. Expected improvement in living standards and drops in unemployment are two of the factors boosting this index. Consumers say they have the ability to save over the next 12 months and that is an extremely strong response on their part, in the top 7 percent of this historic range. Consumers rate the times as slightly more favorable for spending than they did last month with a net response of -4 compared to -6, a value that ranks in about the top third of its range. Still, consumers rate their current financial situation as below average in only about the 42^nd percentile of its range. That is a slippage from the 52^nd percentile over the past 12 months; for the next 12 months, consumers expect an improvement putting their response in the 63^rd percentile of its range near the upper third.

On balance, the responses by the French consumers are showing slippage. One of the main drivers holding things in place is the improvement that consumers have seen and continue to expect in unemployment. Consumers remain upbeat that their financial situation is going to improve despite this month’s slippage in the overall index.