U.S. Personal Income Light, Real DPI Down and Real PCE Easier

The Chicago Purchasing Manager's Association reported that its November business barometer improved to 52.9 and the 3.2 point rise from October reversed most of that month's deterioration. The latest figure was better than expected. Nevertheless, during the last four months the readings remained near or well below the highs of earlier this year.

During the last ten years there has been a 66% 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 on Monday) and that is the highest correlation of all the regional series with the Nat'l index.

The production component of the Chicago measure gained back most of a sharp drop in October. New orders remained at the October level which was near the lowest since February. The employment index similarly rose but the gain followed three months of decline and the index was to nowhere near the high reached back in July.

The prices paid index rose sharply m/m to the highest level since July of 2006.

Mixed but weakening, conditions. The monthly EU sectors show that weakness still stalks the EU region. Still some sectors have improved this month. The EU industrial index improved in November to +3 from +2. The retail index improved from +2 to +4. Despite that consumer confidence slipped to -7 from -5. The construction sector also switched from being flat to a -1 reading. But the largest drop was in services where the index fell to +14 from +19. The services readings now stand only in the 52nd percentile of its range. Retailing and construction are still in the 90th-something percentiles of their respective ranges. The industrial sector is now in its 88th percentile. But consumer confidence has slipped to the 69th percentile. While there is some mixture in these figures it is clear that the consumer is beset with concerns while the MFG sector has held up. Construction, not having ever been very strong, give us a very high positive range ranking on a raw reading of -1.

The good, the bad and the ugly. Across EMU countries we find weaker conditions in general. The overall sentiment is at a ranking of only the 71st percentile. France still ranks in its 81st percentile. Germany has slipped to its 64th. Italy and Spain hover around the 50% mark for overall sentiment.

Risk of action…and inaction. On balance, Europe is slipping but not yet doing poorly. But we know that exchange rates work with a lag and there is more of that strong euro impact in train. Also, that the recent inflation headline of 3% will send chills up the spine of the ECB. Despite concerns of an overly strong EURO the ECB with too-strong money and credit growth will have a hard time balancing the things it wants to do (hike rates and fight inflation) with the things it does not want to do (weaken already weakening growth and spur an even stronger euro).

Consumer confidence is taking a hit and an ongoing one in EMU. The percentiles tell an interesting story of these unfolding developments. It is no surprise (final column of the table) that the strongest correlation with Consumer Confidence is expected unemployment. Expected unemployment is rising but is only in its 15th percentile. Expected savings is also a very weak percentile reading as is ‘major purchases now’. The later figure is plotted in the chart along with the consumer confidence main index. ‘Major purchases now’ responses seem to lead the overall index -- and this series is very weak.

The strongest range readings are for price trends (past 12 months and future 12 months) and for the ‘economic situation past 12 months’. In other words the more topical the categories, the weaker the responses.

Across countries Germany’s responses are still quite strong in the top 17 percent of its range. The UK in the 68th percentile is next followed by France in the 60th percentile. Italy and Spain are weak with readings below the 50th percentile.

It should not be a surprise that (apart from the UK) all these countries are in the same currency union and are experiencing the same pains of a strong currency. Germany, a county used to a strong currency, finds its consumers faring best. Italy and Spain, two previously weak currency countries, are having a much more difficult time making the adjustment to the strong euro.

The monthly HICP has finally done it. It has moved up 3% and the ECB is stuck on the horns of a real dilemma. Prices are zooming up across the Euro area and most of it is oil. But 3% is a long way from 2%, the ECB’s oft stated limit for inflation. And the inflation rate shows a steady acceleration in recent months: a 5.8% rate over three months, 3.6% over 6 months 3% over 12 months… A year ago inflation was at 1.9% Yr/Yr. Now it is at 3% and pressing higher. Germany and Italy also with topical inflation reports available (Nov) show the same pattern and same ugly development.

If the ECB makes any more excuses it will look like that old three-stooges skit where the boys dare a muscle-bound bully to cross this line in the sand then keep redrawing it as he steps over it before they turn and run away. Nice image, eh?

Not only is inflation flaring on the headline but the core has been less than well behaved and money and credit growth have been excessive for so long that even the three stooges skit seems an inappropriate analogy by comparison.

The ECB has its back against a very uncomfortable wall and its bare feet on very hot tin roof. It is worried about second round inflation taking hold as first round inflation is stubbornly – and now chronically - well past its barrier. And Europe has the excessive liquidity to make that fear of second round effects real… but it also has the euro so strong that economic growth already is being undercut.

Welcome, Mr. Euro, to the realm of the reserve currency unit. This is exactly the sort of dilemma we have warned that Europe is not ready to face. And now it is front and center. The problem with being a reserve currency is that those hot little capital flows don’t always come when you want them. Those economic hot flashes can create trouble. Now Europe is on the brink of hiking rates and creating another episode of euro strength at a time it isn’t really needed or desired. The envelope please, Mr Trichet…

The IFO released its survey detail for its sector results previously announced for November. The IFO headlines are dropping steadily and consistently. Manufacturing, while showing some bounce in other recent surveys, is giving off strings of negative readings that reflect diminished growth from one year ago and fading prospects. In fact the IFO activity response is weaker Y/Yr for three months running. Demand is off for at least five months running. ‘Foreign orders on hand’ has been the slowest series to react but it is now down Yr/Yr for two months in a row.

The current situation is evaluated as steady for the last two months running. It remains in nearly the top 5% of the range for current situation historically. But business expectations continue to erode. They are still in the top one third of their range, but barely.

In the outlook for the next three months conditions are slipping. Retail orders expectations are erratically moving lower although this month interrupted a two month period of severe Yr/Yr drops. Wholesaling is however weakening rapidly and severely compared to its year ago levels. Export business expectations are consistently weaker than they were a year ago. Employment expectations continue to improve. Surely if the other trends are valid, that one can’t last.