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

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
Global| Jul 27 2022
The Global Risk Rises- and There Is No Way Around It
Money slows as credit grows… faster Money illusion is an economic term for the distortion that occurs when a significant difference develops between the money cost of an item and the economic burden of purchasing it. For example, I have joked that inflation has made me stronger because I did not used to be able to go to the store and so easily carry home $100 worth of groceries. The illusion in this example is that $100 worth of groceries is the same thing it used to be. Of course, I am not stronger. Inflation has not made me stronger. Inflation has made my load lighter by causing $100 to purchase less than it used to. Money illusion is meant to clarify the fallacy of thinking that your wages are really higher or that your income is higher because they have risen in dollar terms when inflation is growing faster than your wages or income are rising and when your purchasing power has fallen.

To clarify those points, I have created the table below that looks in the upper panel at nominal growth rates for money and credit and then directly below on the same frequencies creates growth rates for the inflation-adjusted (real) flows.

The nominal flows in the upper panel show that money supply is decelerating in the European Monetary Union; it grew at 7.7% over three years, at a 6.8% pace over two years, and at a 6.1% pace over 12 months, but over three months the annualized growth rate is now down to 4%. There is also a deceleration in the real balances on those same same timelines. Three-year real balance money supply growth in the EMU is 4% and over two years it's 1.5%, but over 12 months it's declining at a 2.3% annual rate, and over three months the money stock in real terms is falling at a 3.2% annual rate.

In both cases, money supply is decelerating. So in some sense, you could say that the signal is the same; however, since economists think that the absolute growth rate of money supply matters, there's a big difference between saying that money is growing at a 4% annual rate over three months or that the real money stock is declining at a 3.2% annual rate over three months.

Clearly the ECB policy has been tightening regarding money supply. Skipping past the credit columns for the moment, we see the same thing going on for money supply growth in the U.S. and in the UK, and to a lesser extent in Japan. The U.S. money stock decelerates from a huge 13.7% growth rate over three years to a decline at a 1.3% annual rate over three months. The U.S. real money stock grows at an 8.3% annual rate over three years but is now shrinking at an 11.1% annual rate over three months (yikes!). The U.K. shows money growth over three years at a 7.8% pace, decelerating to a 2.7% annual rate over three months. The U.K. real money stock grows at a 4.1% pace over three years and is now declining at a 10.2% annual rate over three months. Japan’s nominal money stock grows at a 5.5% pace over three years and slows to a 3.5% pace over three months. Over three years Japan’s real money stock rose at a 4.8% annual rate; over three months the real money stock in Japan is still growing but has slowed to a 0.7% annual rate. Japan had much lower inflation than elsewhere, as result its distortions and the unwinding of its distortions creates less distress.

These statistics make it clear that money supply has slowed, and that the real money stock is falling in most of the major money center countries. Looking at interest rates alone may hide the degree of tightening that we're seeing on the part of central banks. Of course, this judgment is always complicated because the money figures that are reported are called ‘money supply’ but they are, of course, the result of supply and demand interactions in the marketplace that occur as the central bank sets the short-term interest rate. So, for any given interest rate, if demand is shifting, that can cause a change in the money growth rate even as the central bank holds the nominal interest rate target steady. It's highly likely with the weakening economy in Europe that money demand is weakening and that the weakening that we see in the growth rates of the money stock reflect not just to squeezing by the central bank but also a pullback in money holding patterns on the part of the public.

The euro area offers an interesting presentation on what is going on with credit demand. Credit to residents in the European Monetary Union is up at a 3.9% annual rate over three years; that drifts down to 3.8% over two years but then ratchets up to a 5.4% annual rate over 12 months and further to 6.7% at an annual rate over three months. However, credit - deflated for the effects of inflation - shows three-year growth at a 0.3% pace falling to -1.3% pace over two years and falling to -3% over 12 months, then it ‘speeds up’ slightly to fall at a slightly slower -0.8% pace over three months. What we see here is that as nominal money supply has slowed, nominal credit growth has increased. This may be evidence that the tighter credit policies in the EMU are starting to work and that transactors have been forced into the credit market to borrow to meet their business and personal needs. While real money supply (demand?) is falling sharply in the EMU, real credit growth has also started to fall but is falling at a slower pace as nominal credit speeds up.

The same trends pertain to private credit in the EMU where the three-year growth rate for nominal credit is at a 4.2% pace; that accelerates to a 7.1% annual rate over three months against real credit balances that rise at a 0.6% rate over three years then drop to a -0.4% pace annualized over three months. The private sector in these credit statistics shows signs of being under stress and needing to increase credit use to stay afloat. I make this judgment rather than a judgment that the economy is speeding up and increasing its credit demands because the underlying economic statistics show there is economic slowing in place. When there is economic slowing, monetary tightening, and an increase in credit demand it is much more likely to be the product of distress.
by:Robert Brusca
|in:Economy in Brief
United Kingdom| Jul 26 2022
Distributive Trades Deteriorate in U.K.
The distributive trades survey for the United Kingdom shows broad weakness in July for the retail sector and broad weakness for volumes in the wholesale sector as well. The expectations readings for both portions of the survey show weak current standings as well as a weakening outlook.

Retailing The retail sector in July shows a -4 reading for sales compared to one-year ago; that is a slight improvement from -5 in June, but it deteriorates from -1 in May. Orders, compared to one year ago, log a -13 reading in July, down from -8 in June and 2 in May. Sales evaluated for the time of year perform better with a - 9 reading in July compared to a -19 reading in June and a reading of zero in May. The stock sales relationship shows an increase to 29 in July from 12 in June and 11 in May. The standings for these four metrics show sales compared to a year ago with a 24.6 percentile standing, orders compared to a year ago with a 20.8 percentile standing, sales for the time of year at a 38.7 percentile standing, and the stock sales relationship at a very high 95.4 percentile standing indicating potentially that inventories are becoming overbuilt.

Looking ahead at expectations for retail performance, in August expected sales compared to a year ago dive to a -14 reading from -2 in July. Orders log a much weaker -28 compared to a -10 in July. Sales for the time of year log a -6 reading which is a significant improvement from -25 in July while the stock sales ratio climbs to 25 from 12 in July. Ranking these standings, expected sales compared to a year ago have a weak 11.6 percentile standing, expected orders for a year ago have a weak 6.3 percentile standing, sales for the time of year have a better, but still quite weak, 37.2 percentile standing; the expected stock sales ratio is very strong with a 97.2 percentile standing. On balance, retailing and its outlook remain quite weak.

Wholesaling The distributive trade assessment for wholesaling shows sales compared to a year ago at -13 in July, weaker than June’s rating and a sharp reversal from 30 in May. Orders compared to a year ago are up to an 11 reading in July, higher than a reading of 1 in June but well short of a reading of 19 in May. Sales for the time of year fell to a reading of 9 in July compared to 20 in June and 41 in May. The stock-sales relationship in July is at 10 which is up from -8 in June and is even with 10 in May. The percentile standings for wholesale sales data are generally firmer than they are for retailing in June but for the most part still weak with sales compared to a year ago at a 15.8 percentile standing, orders compared to a year ago have a 53.2 percentile standing; that is above the historic median. Sales for the time of year have a 43-percentile standing while the stock sales relationship has a 38-percentile standing.

Looking at expectations for wholesaling in August, expected sales fall sharply to a - 18 reading from 9 in July and stronger values in June and May. Orders compared to a year ago fall to zero in August compared to 8 in July and much stronger values in June and May. Sales for the time of year fall to a -11 reading from 12 in July and much stronger readings in June and in May. The stock sales relationship logs a 10 reading in August which is up sharply from -6 in July and readings close to zero in June and May. There is clear and sharp deterioration compared to May and June.

Neither the retailing nor the wholesaling portions of the survey are very reassuring. The best standing in the series apart from the stock sales relationship comes from a marginally above median reading for wholesaling orders compared to a year ago. Everything else shows weakness compared to historic median standings. Given the situation for the economy and in Europe, this is not surprising.
by:Robert Brusca
|in:Economy in Brief
United Kingdom| Jul 25 2022
U.K. CBI Business Optimism Improves for Q3 (Still Weak)
Business optimism in the U.K. improved in the third quarter to a reading of -21 from a very low reading of -34 in the second quarter. Yet, the U.K. economy continues to be under a great deal of pressure and all the risk factors that had been in play remain in play from the Ukraine-Russia War to the ongoing COVID issues, to the central bank raising interest rates. But optimism is not as negative in the third quarter as it was in Q2. Its standing has improved to a lower 23 percentile level from a lower 9 percentile level previously. While there is considerable improvement month-to-month, it's still a very weak report.

Export optimism improved in the third quarter compared to the second quarter although expectations for capital expenditures for buildings remained at the same reading as in Q3; assessments of capital expenditures for equipment moved higher. Capital expenditure expectations for both categories are quite high with 85-percentile standings for buildings and with a 91-percentile standing for equipment.

The number employed over the last three months backtracked slightly in Q3 but still has a 94.5 percentile standing with the trend still and a 96-percentile standing although it also backed off in the third quarter. New orders from three months ago fell back to a +11 reading from +22 in the second quarter marking a 73-percentile standing, but the volume of orders expected three months ahead improved; that response has only a 57-percentile standing. Domestic orders versus expectations show a stronger standing for current orders compared to expectations; the same is true for foreign orders over the last three months versus expectations for three months ahead. Expectations for domestic and foreign orders each show sub-median readings for three months ahead.

The output metric fell back in the third quarter to a +6 reading from +19 to a standing at its 55th percentile; expectations for output for the period ahead also fell to a reading of +6 from +17 in the second quarter but that yields a low standing in its 39th percentile below its historic median.

Finished stocks record a little assessment change between quarters with the standing in the 90th percentile while the three-month-ahead assessment for stocks drops to a -10 reading from +1 to a below-median 42.5 percentile standing.

Next is series of readings on the cost of output: domestic orders and foreign orders show extremely high readings for both the current and the expected values over the past three months as well as for the next three months. All these metrics have high 90th percentile standings. Clearly inflation is expected to be engaged.

On balance, the quarterly CBI series shows an improvement in expectations although still a great deal of weakness and clear expectations that inflation is going to continue to be a factor in the period ahead.
by:Robert Brusca
|in:Economy in Brief
Europe| Jul 22 2022
PMIs Weaken Broadly, Batten Down the Hatches
You don't have to put too fine a point on it this month to see the trend. The flash PMI readings show weakening across all the countries and all the categories for which we have flash readings in the table for July. There's growing weakness in the EMU, Germany, France, the United Kingdom, Japan, and the United States. There is growing weakness in manufacturing and services everywhere in July – except for manufacturing in the U.K. No judgement is required here.

In June, the readings were similarly weak but not as unequivocally weak. In June, the U.K. had a stronger services sector and a stronger headline (composite) while Japan also had a stronger services sector and a stronger headline with all other countries and sectors finding weakening month-to-month. May found only one composite index getting stronger that was Japan on the strength of a better services sector while there was also strengthening for manufacturing in Germany that was not enough to support the composite.

We also look at trends with three-, six-, and 12-month averages. These averages in the table are lagged by one month; they're only constructed over final data not over the preliminary or flash data. On this basis, a little bit more strength appears in the numbers and particularly a surprising result over three months compared to the three months that appear individually in the table; but then for the moving averages of three-, six-, and 12-months we are not including the month of July. However, at the far right of the table the change calculations are done on up-to-date data, including the flash readings, and there you see more widespread deterioration particularly over three months.

Even so, it's clear from the sequential averages that there is weakening in progress. And it's clear from the change data on the far right that over three months the weakening is in fact quite broad based and rather severe.

We can also try to get more of a sense of what things are like in absolute terms by looking at the queue standing or ranking data. As of July, only three readings in the table stand above their medians calculated back to January 2018. Those exceptions are the services sector in the U.K., the services sector in Japan, and Japan's composite; the latter barely beats the 50% mark at 50.9%. The United States this month comes in with the weakest data in the table with a composite reading in its lower 5.5 percentile based on a services sector that is in its lower 5.5 percentile as well. The EMU index challenges U.S. weakness with the ranking at its lower 14.5 percentile that comes about not because of extreme weakness in one sector but because of paired weakness in manufacturing and services with standings in roughly the 30th to 23rd percentiles of their respective rankings. This weakness occurs because of the weight of Germany in the EMU. Germany has an overall ranking in the 7.3 percentile, close to the U.S. and gets there the same way the EMU does, with paired weakness in manufacturing and services with rankings in the 20th the 30th percentiles, in rough terms.

The United States, the European Monetary Union, Germany, and France all have composite readings that are below the readings from January 2020 before COVID struck. This is not a good development.
by:Robert Brusca
|in:Economy in Brief
Japan| Jul 21 2022
Japan's Trade Deficit Balloons
Japan's trade trends continue to weaken as its deficit rose again in June and as the trend for the deficit continues to worsen from 12-months to six-months to three-months. Twelve-months ago, the trade position was in surplus. That's now a thing of the past.

The trends clearly showed that imports are stuck at a very high growth level well above that for exports; exports are trendless and fluctuating in much lower range of growth. Imports fluctuate in a higher range of growth and show some signs of accelerating.

Not surprisingly, during this period the yen has been weakening and weakening sharply; the yen is off by 21.7% over 12 months, it's falling at a 38.5% annual rate over six months and at a 62.9% annual rate over three months. A weaker yen makes imports more expensive at home and exports cheaper abroad. More expensive imports should cause consumers to buy fewer of them while cheaper exports should increase Japan's export penetration. On balance, the weaker yen should work to correct Japan's widening trade deficit. That, of course, is in theory.

In practice, the weak yen creates some problems for Japan. One is that the weaker yen makes oil imports even more expensive. In the short run, it's hard for consumers to substitute away from an energy source. To the extent that the weak yen causes the yen price of oil to rise sharply, the Japanese trade balance expressed in yen terms will widen for some time. Eventually consumers may find a way to cope with higher energy prices… to use more insulation, to buy more fuel-efficient cars, and so on. In time there is a price elasticity for energy products and energy consumption can be reduced. In Japan, however, there is a move afoot to recommission shuttered nuclear power plants. In the wake of Japan's nuclear disaster, they were all being decommissioned. But now in the face of global warming and high global energy prices, Japan is extending the commission on some plants that had been scheduled to be closed and making plans to open others. This could help to reduce its energy bill.

We can see the impact of the currency shifts on Japan prices as import prices are up by 46.2% over 12 months, up at a 58.8% pace over six months, and up at a 110.7% annual rate over three months. The weaker yen is pushing import prices up strongly. However, export prices also show substantial life, rising 18.8% over 12 months, at a 28.1% pace over six months and at a 40.1% pace over three months. The weakening yen allows Japanese exporters to raise their yen price and still to cut their export price in foreign currency terms. This is another way that a weakening currency helps to right the trade balance. Exports get a double boost because prices in the export market fall in foreign currency terms and through the effect of price elasticities that should cause the volumes purchased to rise more sharply. At the same time the yen prices are rising and so this can have a very positive effect on export prices and on export values.

Because prices move in advance of volumes, there is something called A ‘J-curve’ that reflects the fact that after a currency falls the trade balance often gets worse before it gets better sketching out a pattern of the letter ‘J’ lying face down. This mostly because of imports have prices rising before consumer react to buy fewer imports so total import value rises after a currency depreciates – note the rapid increase in Japan import values.

So far, the impact on real flows isn't discernible; exports are still weak across all horizons, down by 0.4% over 12 months, down by 3.5% at an annual rate over six months and down at a 2.1% annualized pace over three months. Real imports fall by 2.3% over 12 months, rise at a 5.7% annualized rate over six months but then fall at a 5.4% annual rate over three months. The impact of the currency rate change has yet to set in on trade flows.
by:Robert Brusca
|in:Economy in Brief
United Kingdom| Jul 20 2022
Deloitte Surveyed CFOs Batten Down Their Hatches in the U.K.
CFOs in the U.K. responding to the Deloitte survey paint a dour picture of current circumstances and a picture of difficult circumstances for the coming 12 months. Among the ten elements in the current survey, the highest standing goes to the cost of credit being high, followed by a very high ranking for financial and economic uncertainty, a moderately high reading for demand for credit for the next year, and a moderately firm reading on corporate leverage. These responses show us that CFOs are wary about credit costs, needs for credit and about financial uncertainty.

The lowest rating among these current conditions is for the attractiveness of corporate debt. Clearly in this environment with high inflation and rising interest rates, corporate debt isn't attractive. This is the lowest rating in the survey on this timeline for this component. As an overall view, there's also an extremely weak reading for the financial prospects compared to three months ago. That assessment has been lower less than 5% of the time. And in a related low ranking, CFOs rate credit availability as quite poor and equity issuance as unattractive. Bank borrowing is also viewed as unattractive. There is a low, 31 percentile standing, in response to the question it's a good time to take risk. Only one third of the surveyed CFOs think that it's a good time to take risk.

Turning to some of the key metrics for 12 months ahead, the two lowest responses are for operating cash flow and for cash (or equivalent) levels. Operating margins also get very low assessment standing in the lower 5% of their historic queue of values. Dividends and share buybacks show a standing in the lower 10% of their historic queues. CFOs give their expected revenues a lower one-third standing for the next 12 months. Capital expenditures have a lower 25 percentile standing. Ranking very high, of course, are costs: operating costs have a 97.8 percentile standing as do financing costs.

Looking at the survey responses by quarter, much of this weakening has occurred within the last two quarters. Almost any category that you would consider a good response has deteriorated sharply over two quarters; all those considered bad responses have increased sharply. The outlook portion of the survey mostly began to deteriorate sharply as of Q1 2022. Deterioration has continued or worsened into Q2 2022.

Looking at changes since Q4 2019, which takes us back before the COVID virus struck, we see that for the most part bad metrics have gotten worse and good metrics have deteriorated. Despite there have been a significant recovery after COVID struck, the rise in inflation seems to have reintroduced an extremely negative sentiment across CFOs in the United Kingdom. The survey gives us a road map of how CFOs are starting to pull back and batten down the hatches and prepare for bad things to happen as inflation continues to linger high, as the Bank of England gets prepared to raise rates further and as war continues between Ukraine and Russia causing risks of more supply disruption and higher inflation to linger. There's almost nothing in this survey from which to take heart.
by:Robert Brusca
|in:Economy in Brief
Europe| Jul 19 2022
ECB Gets Ready to Meet As Inflation Scorches Europe; The Scorching, Greening, and Dashed Dreaming of Europe
Europe is not just being roasted by global warming, extremely hot temperatures, and raging forest fires, but also by an extremely overheated inflation rate. The targeted HICP inflation rate for June rose by 0.7%, taking the year-over-year rate up to 8.6%. The core rate slowed in June, rising by 0.1%, after a gain of 0.5% in May, but it's up at a 3.7% annual rate year-over-year in June.

The headline inflation rate shows some cooling in its path as its 8.6% 12-month rate is at a 10.9% annualized rate over six months, then cools to a 6.5% pace over three months. The core rate, however, continues to accelerate from 3.7% over 12 months to 4.2% over six months, to 4.3% over three months.

The ECB at long last is getting ready to raise rates at this week's meeting. There is some speculation that there could even be a 50-basis point rate hike, not just a first-step 25-basis point rate hike. The Bank of Canada just hiked rates by 100bp; last meeting the Fed stepped its pace up to 75bp when 50bp had been expected. The ECB has been struggling with the issue of fragmentation which it's an attempt to deal with the disparate impact of inflation and rising interest rates across various European Monetary Union members. All eyes are going to be on the ECB this Thursday.

Clear, if mixed, inflation trends Inflation trends in the European Monetary Union are clear. Looking at the four largest EMU economies, the 12-month inflation rates range from a high of 10% in Spain to a low of 6.5% in France with Germany logging an 8.3% pace and Italy logging an 8.5% pace. The progression of inflation from 12-months to six-months to three-months over these countries shows mixed trends – but they are the same mixed trends across these four countries. There is acceleration from 12-months to six-months in all cases. Over six months inflation ranges from 11.9% in an annual rate in Italy and Spain to 9.5% annualized in France. However, over three months the inflation rate breaks lower in each of these countries, ranging between 9.7% in Italy to 5.3% in Germany. All these, of course, are clearly excessive rates and excessive compared to the 2% average that the ECB now aims at. Since the ECB is looking at some sort of (unspecified) average, it is likely that the higher 12-month inflation rates are more relevant for policy than the inflation rates calculated over short periods.

Core inflation trends Core inflation tells a slightly different story although it's not necessarily a story that is better; in some ways it is better and in other ways the story is worse. The story of core inflation is being told from lower levels of inflation than what we see in the headline. That much is good news. Over 12 months the inflation rate among the four largest EMU economies for either core or ex-energy inflation (ex-energy in the case of Germany) ranges from 3.5% in France to 5.4% in Spain. Over six months core inflation accelerates the same as with headline inflation. It accelerates in each country with the pace of inflation over six months annualized, ranging from 4.4% in Germany to 7.6% in Spain. But now we get to the part where things get worse rather than better. Over three months inflation accelerates in each of these countries. Inflation in Germany is the lowest at 4.7% while inflation in Italy is at a pace of 8.2%; inflation in France comes in at a 5.8% pace while Spain's rate is at a 7.8% pace.

Compares and contrast
Headline inflation in the EMU runs at 8.6% over 12 months and then decelerates to 6.5% over three months. The core inflation rate runs at 3.7% over 12 months but accelerates to 4.3% over three months. The levels of core inflation are more tolerable than for the headline, but the pattern for the core showing ongoing acceleration is more worrisome. These two measures leave the ECB with nowhere to hide.

A longer view
Also worrisome are the five-year results for inflation. The compounded five-year inflation rate as of June for the headline is 2.8%. Despite some persistent inflation undershooting before inflation jumped up, inflation has now become so strong in the recent months that the compounded inflation rate over five years has moved above a 2% pace. Core inflation, however, still fits inside of the objective of the ECB at a 1.6% pace. Looked at in terms of the four largest EMU members, each of them has a five-year average well above 2%. For Spain, the average is 3%; for Germany it's 2.9%; for France it's 2.5%; and for Italy it's 2.3%. However, the inflation rate for the core is still tame: German inflation excluding energy is up at a compound pace of 2.1% arguably at the borderline of acceptability. Spain logs a 1.7% pace, France logs a 1.6% pace, while Italy's pace for compounded inflation is 1.3%.

Excess inflation
Excess inflation is still largely being driven by energy as well as food components. When we exclude those two things and look at core inflation, it is better behaved; however, it is still over the line. Over these longer five-year periods, core inflation appears more suitable. But for how long with that be the case with inflation still running so hot?

ECB policy challenges
The ECB continues to have problems and questions with the outlook for energy in July still in flux. Brent energy prices measured in euros fell by 3.8% in June after rising 23% in May and 9.6% in April. Brent measured the same way rose at a 184% annual rate over the last three months. And there are ongoing concerns about what will happen with energy prices. U.S. President Joe Biden just got back from a trip to Saudi Arabia where he tried to convince the Saudis to pump more oil to help alleviate the stress on world markets. In the immediate aftermath of this trip, it doesn't sound like he was very successful, but time will tell what OPEC-plus will do.
by:Robert Brusca
|in:Economy in Brief