Introducing

Robert Brusca

Robert A. Brusca is Chief Economist of Fact and Opinion Economics, a consulting firm he founded in Manhattan. He has been an economist on Wall Street for over 25 years. He has visited central banking and large institutional clients in over 30 countries in his career as an economist. Mr. Brusca was a Divisional Research Chief at the Federal Reserve Bank of NY (Chief of the International Financial markets Division), a Fed Watcher at Irving Trust and Chief Economist at Nikko Securities International. He is widely quoted and appears in various media. Mr. Brusca holds an MA and Ph.D. in economics from Michigan State University and a BA in Economics from the University of Michigan. His research pursues his strong interests in non aligned policy economics as well as international economics. FAO Economics’ research targets investors to assist them in making better investment decisions in stocks, bonds and in a variety of international assets. The company does not manage money and has no conflicts in giving economic advice.

Publications by Robert Brusca

Europe| Aug 12 2022
EMU Output Makes Solid Gain in June
The European Monetary Union (EMU) posted a 0.7% increase for industrial output in June, following a 2.1% increase in May. Industrial output is solid with a 2.6% growth rate over 12 months, 2.3% growth rate over six months and a 13.8% annualized rate of growth over three months. The tracking for manufacturing growth alone generally follows the same pattern with a 1% gain in June and 11.9% annualized rate over three months.

The June report completes data for the second quarter. In the second quarter, total output is up at a 4.5% annual rate; manufacturing output is up at a 2.3% annual rate. Output gains by sector are led by consumer durables at a 9.4% annualized rate. Consumer nondurables output rises at a 4.9% pace, capital goods output has come back strongly with a 5.6% annual rate increase, and intermediate goods output showed a decline at a 1.4% annualized rate.

All the sectors show increases in output compared to the pre COVID level of output in January 2020. Overall output is up 2.7% with manufacturing output up by 2.5% over that span. Consumer durables has the largest gain at 6.3% followed by consumer nondurables at 5.6%. The smallest gain is from the capital goods sector with a rise of 0.9%. Intermediate goods output is up by 2.2% over the span.

The manufacturing and industrial output performance numbers do not fit well with the manufacturing PMI as the manufacturing PMI show reduced activity in April, May, and June. In all three months manufacturing output progressed from the flat in April to up 1.8% in May and up 1.0% month-to-month in June. However, at a PMI diffusion value of 52, the manufacturing PMI gauge for the EMU does show expansion. But it doesn't show strength; it is showing persistent cooling.
by:Robert Brusca
|in:Economy in Brief
United Kingdom| Aug 11 2022
RICS Survey Points to More U.K. Housing Sector Weakness
The survey of housing market conditions in the U.K. continues to show strength in prices versus weakness in activity. Housing price expectations, however, were reduced on the month as new sales continued to post weaker results and sales prospects fell sharpy to a weak level. The residential survey from the Royal Institute of Chartered Surveyors (RICS) demonstrates the growing malaise and also the mixed set of conditions in the U.K. housing market.

To be sure, house prices continue to gain. But the pace of those gains is slowing as the diffusion index is down to 63 in July from 65 in June and 71 in May. Still, these surveyed values, which are net diffusion indexes, show that on balance there are more prices increasing than decreasing since the reading for July is over 50. Viewed as a percentile standing on data back to 1999, the current three-month trend for the price diffusion index has been higher only about 8% of the time. On this observation alone we might think some weakening is in order.

The clear take away from this survey about prices is that they're still moving up and the upward momentum is still significant. However, a second and perhaps more important take away from this is that the breath of the improvement in the index is shrinking. Recently in this cycle - as recent as April of this year, and February - the house price diffusion index had values as high as 78. Back in June and July of a year ago, the house price index had values of 80 in July and 83 in June.

These conditions have changed as house price expectations have withered; expectations for three-months ahead fell to a net reading of +1 in July from +2 in June and from +12 in May; over the last three months this metric averaged +5; over six months it averaged +16. Clearly house price expectations are diminishing and although the net readings are still positive that is an outlook for prices to rise that is now down to its thinnest possible margin of one-point. Viewing this reading of price expectations against historic data, price expectations have been stronger than this nearly 58% of the time. The metric for price expectations is now below its historic median. And remember this is a thinning and a narrow margin for expected price increases in an economy with severe rising inflation in other prices.

At the same time, new sales log the value of -13 in July which is a very slight improvement from the -14 reading in June. New sales had slipped to that level from -5 in May. The six-month average for new sales has been -4 while the 12-month average is -7. Actual sales have been logging net negative values for some time, but clearly the weakness has just ramped up and gotten more severe.

Expectations for three months ahead echo these changes but with a bit more emphasis. Sales expectations in July slipped to -20 from -11 in June and to minus-one in May. Their six-month average is at zero while their 12-month averages is at +7. Sales expectations have averaged positive numbers for 12 months and flat numbers over six months; this series this has transitioned into a relatively steep negative outlook with the July reading of -20. The July reading, in fact, has a standing in the lower 3.2 percentile of its historic queue of readings on sales expectations. Sales expectations are weaker than this only about 3% of the time. And this is not surprising because actual sales have slipped to a ranking below the 25th percentile so that they are weaker than their current level only about one-quarter of the time. Current and expected-future sales erosions are in sync
by:Robert Brusca
|in:Economy in Brief
Germany| Aug 10 2022
German Inflation Rises
The German inflation rate as measured by the HICP accelerated to 8.4% in July from 8.3% in June; this gain is still short of the peak pace of 8.8% in May. The core rate moved up sharply to log a 12-month gain of 4.6% from 4.2% a month ago; it is also short of its peak rise of 4.7%, also in May. Still, these are high rates of inflation and well above the target for all the European Monetary Area, a target of around 2% since the new objective for the ECB is an average of 2%.

The month-to-month change in the July HICP was a gain of 0.6%, a sharp turnaround from June’s 0.2% drop. The core rate also rose by 0.6% in July, also sharply higher than its 0.3% decline in June. Both the headline and the core measures had risen sharply in May with the headline up 1.1% month-to-month and the core up 0.8% month-to-month. What we learn by looking at the monthly values is not much. May saw a terrific spike, June gave us some relief from that spike, but now in July inflation is back running hot – even as energy prices cooled a bit.

The German domestic measure of inflation has tracked the same changes as the overall HICP. The headline rose by 0.5% in July after falling by 0.2% in June and currently shows a 7.6% increase year-over-year. The CPI excluding energy for the domestic inflation measure shows a 0.6% rise in July after falling by 0.3% in June; it is up by 4.4% year-over-year (a bit less than the core for the HICP measure).

Over the 11 categories in the table, inflation is accelerating in 59% of them in July. This is a sharp pickup in diffusion from June and May when inflation was accelerating and only 27% of the categories and 18%, respectively.

However, the sequential diffusion readings are much more worrisome. Over three months inflation diffusion is 63.6%, over six months it’s at 72.7%, and over 12 months it's 54.5%. The diffusion calculations represent the percentage of the categories with inflation rising and half of the categories with inflation unchanged; a value of 50% is neutral in terms of inflation acceleration and deceleration. Values higher than 50% indicate inflation is accelerating; values below 50% indicate a deceleration. Of course, the actual inflation figure for the month may not behave this way because the inflation statistics are weighted. The diffusion statistics are not weighted; they're just applied across categories.

Even though headline inflation is up sharply over 12 months at 8.4% compared to 3.2% a year ago, the diffusion calculation on that comparison is only at 54.5%, just a small measure above the 50% acceleration guideline. Setting aside the issue of the weighting the categories, one of the reasons that the diffusion indexes is low while inflation itself accelerates sharply over 12 months is that among the categories that see price increases the acceleration averages about five percentage points whereas among the categories where inflation decreases, the decelerations average only about two percentage points. But the diffusion calculation is about the number of categories that are moving not about magnitudes. So, with six categories accelerating and five decelerating, the accelerators win and we get a diffusion reading slightly above 50%. But in terms of the inflation number, we get a much higher inflation number than this diffusion calculation would suggest because where inflation is accelerating it's accelerating sharply and where inflation is decelerating it's decelerating at about half the pace of its acceleration. This, of course, is in addition to the differences in weighting across the categories. Diffusion is a useful metric we see it used in the PMI reports, for example. But it also has some limitations. One thing it is good for is assessing inflation’s breadth. As of July, over six months and three months, inflation is rising both strongly and broadly.

Oil prices were factor tending to move inflation lower in July. Brent oil prices expressed in euros had risen by 7.6% month-to-month in May and by 5.3% month-to-month in June, but in July those prices fell by 7.3%. Sequentially, Brent prices have slowed down as well. Brent rises at a 21.6% annual rate over three months, at an 85.9% annual rate over six months and at a 64.1% annual rate over 12 months. This compares to a rise of 66.9% year-over-year one year ago. The break in Brent prices should help to pave the way for milder inflation in the future if global oil prices continue to trade in this lower range or lower.

The bottom line for Germany is that inflation is still far too strong. The ECB is raising rates, but it is also worried about fragmentation in the euro area and the threat of an energy cut off from the Russian pipeline that would cripple most of Europe. Russia has reduced the oil flow already using what many regard as a bogus maintenance excuse. Inflation is clearly too high in the EMU; it continues to cook at a torrid pace in Germany and in Europe and yet the ECB finds its hand is stayed by concerns about how geopolitical and economic risks interact in the euro area. It's a tricky situation all around and inflation is still far too high.
by:Robert Brusca
|in:Economy in Brief
Global| Aug 09 2022
OECD LEIs Point to a Ramp Down in Growth - and Nothing More
The OECD metrics this month show a broad tendency for growth to slow down. In July, the overall OECD measure saw month-to-month declines of 0.2%. It also saw the seven-economies measure fall by 0.2%, the euro area metric fall by 0.2%, and the U.S. measure fall by 0.2%. However, the LEI reading for Japan is flat on the month, the same as it was in June.

Over three months, the LEI growth progression shows declines between 2.4% for the euro area and 2.1% for the OECD overall while Japan logs a number that is the strongest in this group at minus 0.2%. These are annualized growth rates over three months.

Over six months, the metrics range from annual growth is weakest in the euro area at minus 2.5% but for all the OECD the figure is as strong as minus 2%. Japan's reading comes out flat over six months.

Over 12 months, all these areas show growth in the LEIs that range from a low of 2.3% in Japan to a high of 3% in the euro area and in the U.S. So, what we see is a pattern a year ago where the OECD leading economic indicators were growing nicely and then six months pass and there is widespread weakness in the OECD area and over three months that weakness sustains itself.

The percentile standing of the OECD indexes in their level form for all the OECD areas we've just mentioned are in the lower 20th percentile of their respective ranges apart from Japan that has a 62nd percentile standing.
by:Robert Brusca
|in:Economy in Brief
Japan| Aug 08 2022
Japan's Economy Watchers Index and Outlook Fade
The chart for Japan's economy watchers index and components underlines the volatility in the underlying economy and in the outlook since the Covid virus struck. Looking at that chart before Covid, the moves in the current index and in the future index appear calm and trend-related compared to what we have been seeing since early-2020. Just the shortest bit of time and looking at this chart of these time series makes it quite clear that something very different happened and continues to be an operation. From June 2020 to July 2002, volatility in the current index rose by 90% compared to the earlier period from Jan 2014 to Jan 2020 before Covid.

Japan's current economy watchers index has dropped to 43.8 in July from 52.9 in June. The three-month changes is a decline of 6.6-points, the six-month change is a 5.9-point rise, while the 12-month change is a 4.2-point drop. The standing for the current index is at its 34.8 percentile, just outside of the lower 1/3 of its historic queue of values. This is a very low reading. Among the surveyed sectors, retailing with the standing in its 40.9 percentile is the relative strongest with the reading on the job market at its 39.7 percentile mark close behind. The weakest sector right now is eating and drinking indicating the lingering impact that Covid fears have had on Japan’s economy in addition to concerns about growth. The reading for eating and drinking establishments, fell from 62 in June to 30.8 in July.

Japan's economy watchers future index also is weak; it fell in July to 42.8 from 47.6 in June. That index has a 21.5 percentile standing, a standing near the boundary of the lower one fifth of its historic queue of data. The future index is down by 7.5 points over three months, up by 0.3 points over six months and lower by 4.5-points over 12 months.

The strongest reading in the future index is for employment at a 35.2 percentile standing, followed by a 34.4 percentile standing for eating and drinking places. This seems to underscore that the current ranking for eating and drinking places is so weak it is viewed as temporary so that a future rebound is expected. The weakest readings in the future index are for housing in its lower 10-percentile followed by services in its 13.4 percentile.

The economy watchers index is clearly emanating weak signals and signals that have weakened sharply over the last three months.

The July reading of the economy watchers survey both current conditions and for the future index underscore difficulties in the Japanese economy. However, because of the choppy nature of both the current and the future indexes, we can't be particularly sure that this is a reliable reading. These readings seem to chop up and down over very short periods; we will be open the possibility that there could be a rebound next month. That's not a forecast; it's just an interpretation of the time series and its recent behavior. If there is another weak reading in a month, that will start thinking that it's more of an authentic sign of weakening in the economy. For now, we simply can't be sure. However, in the context of the global environment, in the context of what's going on with Japan's main trading partners, and in the context of the heightened geopolitical risk, there's every reason to think that these weak readings for the current index and for the future index may in fact be real.
by:Robert Brusca
|in:Economy in Brief
Japan| Aug 05 2022
Japan's LEI Waffles and Slows
Japan's leading economic index in June slipped to 100.6 from a level of 101.2 in May. May, in turn, had slipped from a level of 102.9 in April.

The leading economic index, which is an index that tries to look at currently available economic data and assess what it means for future economic performance, declined at a 0.8% annual rate over three months, at a 4.4% annual rate over six months and at a 2.8% annual rate over 12 months. However, because of the timing of the pandemic, over a 24-month period, the index is up at a 21.5% annual rate.

Clearly Japan is solidly in the recovery from COVID; however, it's not continuing to make much headway anymore. The sequential annualized growth rates reported above and presented in the table paint a picture of continuous slowing ahead, although the trend for the slowdown does not have a steady profile. There is a significant decline over 12 months, which worsens over six months, and then shows less distress over three months. On balance, Japan's economy is waffling and continues to get weaker; it has weakened in each of the last two months. This, in part, is because of a tougher comparison with April; in April, the leading economic index moved up to 102.9 from a level of 100.8 in March marking its highest point since December. The LEI index was last higher than its April 2022 level last in July 2021.

When the leading economic index lurches like it has been doing, its signal is less useful to markets and to policymakers.

Consumer confidence The components of the leading economic index are available as of May. They lag by one month; however, there is a related topical economic statistic that also available through June: that is the reading on consumer confidence.

Consumer confidence rose in May compared to April rising to a level of 32.9 from a level of 32, but in June it was set back to 32.2. Consumer confidence has a net gain from April over three months it's falling at a 6% annual rate; falling at a 31.5% annual rate over six months; over 12 months it's falling at a 14.4% annual rate. Like the leading index, consumer confidence is declining over 12 months, the decline speeds up over six-months, then it slows down over three months. These two indexes that draw from diverse kinds of economic data but obviously are linked to the economy suggests that there has been some widespread slowdown that subsequently dissipated. This common pattern is not simply random variability.

LEI components On a lagged basis, the inputs for the Japanese leading economic index show consistent positive changes from the interest rate spread. Loan and deposit changes are also positive although they've slowed. Starts for dwellings have positive changes over six and 12 months but a small net decline over three months. Deliveries and stockpile show month-to-month changes that are positive indicating consistent economic pressures and desires to rebuild stocks. These signals are consistent with growth. However, these metrics, while positive, have slowed on horizons of 12-months, to six-months to three-months. Export growth continues to exceed import growth in the LEI framework and there's no clear trend in that pattern.
by:Robert Brusca
|in:Economy in Brief
United Kingdom| Aug 04 2022
RICS Survey Shows Weakening U.K. Housing Market
With the Bank of England hiking its key rate by 50 basis points and planning to squeeze its balance sheet, the U.K. housing market (the RICS survey covers England and Wales) has been reacting to the central bank's tightening; expectations for prices three-months ahead have lost a lot of momentum. The chart looks at house prices over the last three-months comparing them to expectations for the prices over next three-months. While current prices have begun to soften slightly, there's a much bigger impact on prices expected over the next three-months.

If we rank performance of the last three-months historically, it ranks in the top seven percentile of where prices have been over the last 23 years. And if we rank current house price expectations on that same timeline, they have a 44-percentile standing, below their median (the median stands at a 50-percentile ranking). And this, of course, is occurring in an environment where inflation is hot and is driving prices in the economy higher.

House prices are affected by inflation, but they're affected more immediately by interest rates when there are consequences for mortgage rates. When mortgage rates rise, house payments rise at every given price for housing. And in a market that may have gotten a little overripe with housing prices ramping up in a slightly inflationary environment, an acute vulnerability can develop. Houses can become overpriced or ‘fully priced’ such that increases in official rates can have an outsized impact on the market. Rising mortgage rates would take an already fully priced housing market and create a financing burden for new buyers, depressing prices and sales. And for existing homeowners (well, partial ‘owners’), who are paying their mortgages at variable rates, payments will go up as well.

The Bank of England’s 50 basis-point hike is the biggest hike since 1997. And it's occurring in an environment with a good deal of inflation and where the Bank of England thinks that inflation is going to escalate further before it's able to gain control of it because of past increases in energy prices. Currently the Bank of England looks for its consumer price inflation to peak at just over 13%. Previously had expected the peak to occur at 11%. This is the major reason for the Bank to have adopted the 50-basis point rate hike in August.

Sales expectations have been hit hard, too. Sales expectations had been at a net of +9 in the RICS survey back in April, but in June that figure sits at -9 and has a 9% queue standing which means that it has been weaker historically only 9% of the time over the last 23 years.

New sales are also weakening. But the series ‘new sales’ has been a peculiar series that was extremely strong in May 2021 but then by July had slipped into relatively deep negative readings and then made some recovery posting positive readings in February and March of 2022. However, since then, it has slipped to a reading of -4 in April, to -5 in May, and to -13 in June. The -13 reading has a 23-percentile standing in its queue of data back to 1999. That means that sales were weaker than this about one-quarter of the time historically. And this is only the impact on current sales; sales expectations, as we mentioned above, are still being reduced. We are going to see weaker readings in the months ahead.

The economy is under stress and there are some expectations of a recession. The GfK consumer confidence rating for the U.K. slipped to -41 in June from -40 in May. The reading had been at -38 in April. The 12-month average is -22. Clearly, this series has been slipping significantly in recent months. In June, it has fallen to its all-time low since 1999.
by:Robert Brusca
|in:Economy in Brief
Global| Aug 03 2022
Global Composite PMIs Slow
The S&P composite PMI indexes that combine the services and manufacturing sectors in July show conditions deteriorating month-to-month in all but six of the 22 entries in the table. Doing better on the month in terms of their composite PMI reading are Russia, the UAE, Singapore, Ghana, Egypt, and Nigeria. Large industrial economies are not on this list.

In July, six countries showed month-to-month improvement. In June, seven improved. In May, 12 of the 22 entries in the table showed improvement month-to-month. Clearly there has been a deterioration in the last two months.

Over three months, nine countries show improvement compared to their six-month averages. And over six months, 10 countries show improvement compared to their 12-month averages. Over 12 months, 13 show improvement compared to their year-ago 12-month average. These broader averages also show weakening in progress.

The queue standing statistic positions the current composite PMI readings in a queue of values over the last four and a half years. Expressed in this way, only 7 of the entries in the table have PMI queue standings above the value of 50% which marks their median for this period. The relatively strongest readings are in Singapore, with a 96-percentile standing, in Hong Kong with an 88.9 percentile standing, Brazil with an 88.9 percentile standing, as well as India with an 85.2 percentile standing. However, there are a number of countries with percentile standings in the lower 15-percentile of their queue of values or less. These weak entries include the United States, the European Monetary Union, Germany, Italy, Ghana, Egypt, and Kenya. This disparate group includes some quite small developing economies as well as very large well developed economic entities.

There is in this report both a sense of a relative weakening and absolute weakness. Looking at some of the PMI average values for the U.S., U.K., EMU and Japan, a composite average PMI unweighted average fell to 49.8 in July from 53.4 in May and compares to an average of 53.8 over 12 months. The BRIC group, excluding Russia, shows an improvement in July to 55.3 from 51.7 in May and compares to a 12-month average of 52.1. The average for the full sample of countries falls to 52.3 in July from 54.2 in May and compares to a reading of 53.8 over 12 months. The median falls to 52.2 in July from 54.6 in May and compares to a 12-month average value of 54.5. The average queue standing puts the group's unweighted average at 45.6% while the median standing is at 44.4%. Both of those metrics, of course, reside below 50% which means they're below their historic medians.

These are quite uneven results; the queue standings tell us that these are readings that are extremely weak relative to the historic (4½ year) standings. However, the averages constructed from the PMI diffusion readings show us diffusion metrics of around 52 which imply moderate growth still prevails across the group. Of course, as moderate growth goes, this is considerably weaker growth than what we've seen over the past four and a half years that's the message of the queue standings. A second group of standings based on high-low percentiles that take the current reading and expresses it as a percentile of the highest and lowest reading for the period shows an average percentile standing for the group of 77.9% which is quite a bit stronger. However, these high-low standings, while interesting, are achieved using only three entries the highest the lowest in the current standing while the queue percentile standings use every observation in the period.

The clear conclusion here is that conditions are weakening, and they've become weak by recent standards. There's a growing number of countries showing composite PMIs slowing: There are 17 of these in July, 16 in June, and 12 in May. However, for the 12-month average there are only three of them. In July, there are 7 that report PMIs below 50 indicating contraction; that compares to four in June and four for the 12-month average. These are cautionary statistics. They warn us that conditions are very uneven with some pronounced weakness; the seven observations below a diffusion value of 50 in July is worrisome because of the number and the group's membership: the United States, EMU, Germany, Italy, Ghana, Egypt, and Kenya.
by:Robert Brusca
|in:Economy in Brief
Global| Aug 02 2022
Unemployment Rates Put Covid Behind Them, But What Is in Front of Them Is Frightening
Unemployment rates in the European Monetary Union are stable in June; the overall rate is at 6.6%. Unemployment in the EMU has been at 6.6% for three months in a row; it fell to 6.6% in April from 6.7% in March; it had been at 6.8% in February; it stood at 6.9% in January.

The EMU unemployment rate has stabilized after falling in the economic recovery in the post-COVID period. But unemployment progress has slowed. Unemployment rates rose month-to-month in June in Finland, Portugal, Ireland, and the Netherlands. Month-to-month unemployment rates were unchanged in Belgium, France, and Luxembourg.

The pace of decline in the unemployment rates has slowed in recent months. The number of countries in the table with unemployment rates falling over three months has varied between 12 (all of them) and 10 from mid-2021 until May 2022. This month the number of countries with the unemployment rates falling over three months is down to 7. That is still the majority, but there's a clear fall off in the tendency for unemployment rates by country to fall.

Still, unemployment rates are not dramatically increasing either. There is some tendency for unemployment rates to rise, but it's too soon to call it a significant trend. In April there was one country that saw the unemployment rate rise; that was Belgium. In May there were month-to-month increases for unemployment in Austria, Belgium, Portugal, and the Netherlands. In June there were also four Finland, Ireland, Portugal, and the Netherlands.

These may or may not be isolated cases. But if we look at correlations among unemployment rates across this group of 12 EMU member countries, we find the country with the highest correlation among the countries in the table is the Netherlands where there is a correlation of 0.70. France ranks second with the correlation of 0.65. Belgium ranks third with the correlation of 0.64. Two of these countries are showing unemployment rate increases in May or June or both. If we calculate correlations on changes in unemployment rates for this same group of countries, the Netherlands ranks first, Spain ranks second, France ranks third, and Belgium ranks fourth. The point still holds; two countries where the unemployment rate is rising tend to be relatively important bellwethers for the EMU in terms of unemployment rates and their changes.

Just for the record, and for comparison, the three countries with the lowest correlations with fellow members are Germany, Luxembourg, and Ireland, in that order. While Germany is a very important economy in the euro area and the largest economy as well, it tends to go its own way. That is a problem in terms of making policy for the union, because Germany is often doing things differently from the rest of the monetary union but because Germany's economy is so large it will be dominating and pushing pooled statistics for EMU in a certain direction that may not be representative of the union as a whole - certainly not representative of the union as represented by individual countries.

Recovery is complete but... Based on the data in the table, it is reasonable to call the recovery from the COVID recession complete. Unemployment rates across all countries in the table are below their historic medians except for Greece whose employment rate is almost exactly on its median at a 50.9 percentile standing. Only Belgium has an unemployment rate above where it was just before COVID struck. Belgian's rate is higher by 0.3 percentage points. Irelands rate is equal to what it was before COVID struck. By comparison, the United States and Japan have unemployment rates that are just a tick or two higher than they were before COVID struck.
by:Robert Brusca
|in:Economy in Brief
Global| Aug 01 2022
Manufacturing PMIs Show Slippage in July
The manufacturing PMI gauges weakened broadly in July as there was improvement in only 16% of them in the table, a group consisting of 18 significant international manufacturing centers. This follows June where 22% of the categories improved month-to-month and May when 39% of the categories improved month-to-month. Monthly improvement is becoming less common.

Viewed over broader horizons, over three months 22% of the categories improved, over six months 22% of the categories also improved, and over 12 months, 28% of the categories improved. The three-month calculation compares three-month diffusion to the average over six months, the six-month comparison is to the average over 12 months while the 12-month comparison is to the average of 12-months ago.

The erosion is somewhat slow as over three months the median manufacturing PMI reading is 52.1 compared to a median of 52.9 over six months and of 53.2 over 12 months. On a monthly basis, the median the PMI for this group is at 50.6 in July, down from 52.1 in June, and 53.7 in May. The slippage is steady, but so far it is not severe

However, this ongoing weakness has taken a toll. The queue standings, that look at the current PMI readings by country ranked over the last four and a half years, show standings below the 50% mark (which denotes the median in each case) for all except 6 reporting countries. The median rank standing on this timeline is the 32nd percentile, which puts the median in the lower one-third of all medians in the last four and a half years. These are weak numbers. Still, we also can contrast the rank standings to the position of the current readings in their high low range for the same period. On that basis, there are only two observations, Germany and Taiwan, that are below the midpoints of their respective high-low ranges. The average percentage standing in the range is at its 65th percentile which is a moderately firm standing above the midpoint.

Looking at performance of the manufacturing sector for this group since COVID struck in January 2020, we find the average change in the manufacturing PMI on that timeline is 1.5 points. It tells us that essentially the PMIs are back to a slightly higher level than they occupied before COVID struck in January 2020.

Table 1
by:Robert Brusca
|in:Economy in Brief
Europe| Jul 29 2022
Inflation Trouble in Euro-land
Inflation in the euro area rose sharply again in July, bringing the year-over-year pace to 8.9% compared to a 12-month pace of 8.6% for June. Inflation is running at a pace that is multiples of the European Central Bank’s target of 2%. However, the ECB has finally started to raise rates and, as we showed in a previous research piece, there is a more pronounced inflation-damping impact in train from the slowdown in money supply growth in Europe, which may also be eventually having some impact on the inflation rate.

For now, inflation is still running out of control. In July, the headline inflation accelerated in Germany compared to the gain in June but decelerated in France, Italy, and Spain.

Over three months inflation is decelerating in Germany and in France; it's accelerating in Italy and in Spain. German inflation rises at an 8.4% annual rate over 12 months, at 9.2% pace over six months and falls back to 6.3% over three months. In France, the progression is from 6.8% over 12 months, up to 9.3% over six months and down to 8.4% over three months. Italy and Spain show acceleration across all horizons. In Italy, the 12-month gain of 8.3% moves up to an 11.3% pace over three months. In Spain, the 10.8 percent 12-month pace moves up to a 15.2% annual rate over three months.

In three of four cases, excepting Germany, the three-month inflation rate remains higher than the 12-month inflation rate. In Germany, the three-month rate has dropped to a 6.3% pace from 8.4% over 12 months, a potentially significant drop. In France, the 3-month-to-12-month acceleration is over one and a half percentage points. In Italy, it's three percentage points; in Spain, it's on the order of four and a half percentage points. Inflation for the whole of the European Monetary Union accelerates from 12-months to three-months with a three-month pace about one percentage point stronger than the 12-month pace.

Ex-energy/core trends In Germany, ex-energy inflation gains 4.4% over 12 months, accelerates to a 5.1% annual rate over six months then falls back to a 4% pace over three months The German ex-energy inflation pace, like the German headline pace, is weaker over three months than over 12 months. In Italy, core inflation steadily accelerates from 4.2% over 12 months to 5.6% over six months to 7.7% over three months. The core rate in Italy over three months is higher by about 3.5 percentage points than the 12-month pace – a bit more acceleration than for the headline.

Between June and July, the 12-month inflation rate also stepped up to 8.9% for all EMU from 8.6% in June. The country level inflation rates saw Germany’s rate rise to 8.4% from 8.3%; the French rate rose to 6.8% from 6.5%; the rate in Spain rose to 10.8% from 10% in June. However, in Italy, the inflation rate settled lower at 8.3% in July compared to a rise of 8.5% in June. Germany’s ex-energy inflation rate accelerated in July to 4.4% from 4% in June. The Italian core inflation rate was unchanged between June and July at a pace of 4.2%.

Energy prices for Brent expressed in terms of euros saw a 3.8% decline in July after rising 23.1% in June and by 9.6% in May. The acceleration pace from 12-months to six-months to three-months are still impressively large.

The ramp up in inflation has brought the HICP up to a stunningly high – previously unthinkable- level in July. However, the year-over-year rate has not been this high for that long. In January, it was as low as 5.1%; in July 2021, just a year ago, its pace was a barely excessive 2.2%. As an example, the five-year compounded inflation rate for the EMU is at 2.9%. For Germany, it's at 3%; for France, it's at 2.6%. In Italy, the five-year compounded rate is at 2.4% while in Spain it’s at 3.1%. Much of this is because of the volatile items in the report mainly food and energy, particularly energy. If we look at the five-year compounded German ex-energy rate it is still only at 2.1%. A year ago, inflation was still at a level that was consistent with the target rate set by the European Central Bank for the whole of the euro area. Italy's five-year compounded core inflation rate is at 1.3%, still below the pace targeted for all the euro area.
by:Robert Brusca
|in:Economy in Brief
Germany| Jul 28 2022
Confidence in Europe Crumbles
The table focuses on German consumer confidence from GfK, but it also includes the most up-to-date metrics for Italy, France, and the United Kingdom. For all these countries, consumer confidence is extremely low. In the case of the German GfK measure, for which there's an advance estimate for August, the value of -30.6 is the lowest in the history of this survey. For France, the consumer confidence index at 79.5 has been lower less than 1% of the time. In the U.K., that consumer confidence measure for July has been that weak or weaker less than 1/2 of one percent of the time. In Italy, consumer confidence has been weaker 18% of the time. All of these are extremely low values for consumer confidence.

As inflation has risen globally, consumer confidence has fallen. This has created some confusion about economic performance as there also is concern about economic slowing and the potential for recession. However, what we see shows clearly that economic performance can still be pretty good even if inflation performance is very bad; and yet consumer confidence can register a very low reading in such circumstances. Perhaps the best example of this is in the United States where the unemployment rate remains near 40-year lows and where consumer spending continues to plow ahead and yet with extremely high inflation the U.S. consumer sentiment index, as measured by the University of Michigan survey, is near its historic low. Despite these conditions of low and falling unemployment and advancing consumer spending, many in the U.S. think the economy is in recession. It's confusing…

It's not possible to look at a consumer confidence number and to really know why consumers are feeling as bad as they are. Even the surveys that give detailed readings on the consumer that may allow you to extract certain elements that are particularly bad, it's always hard to know exactly what it is that is nagging at consumer expectations the most and causing the loss of confidence.

In the German survey, there are three components that are available with a one-month lag. These components refer to the reading of -27.7 for July rather than the -30.6 reading for August. However, both are quite weak numbers, and the component values ought to be relevant for what's happening in August even though these are, formally, numbers from July.

In July, economic expectations in Germany fell to a reading of -18.2 from June's -11.7. The economic index has been lower than that reading less than 10% of the time, historically. Income expectations in July fell to a -45.7 reading from June's -33.5. The income expectation rating is the lowest on record. The propensity to buy slipped to a reading of -14.5 in July from -13.7 in June; at that level, the propensity to buy has been weaker historically about 18% of the time.
by:Robert Brusca
|in:Economy in Brief