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| Feb 22 2022
IFO Shows Widespread Rebound; Some Readings Still Lag Their Pre-Covid Values
The IFO business index climate readings all improved in February; the aggregates improved for current conditions and expectations as well. In fact, the lone monthly set back was to expectations in the construction sector.

Climate readings stand above their pre-Covid (January 2020) level overall for manufacturing and in wholesaling. It is hard to see where the rebound has come from since it is not in any obvious way virus-related. In Germany, the infections rates continued higher through January, peaking in the second week of February and coming down slowly. The death rate curve, which is known to lag., reached a local low point in late-January and early-February but has since risen slightly. So the German revitalization either represents some autonomous increase in activity or it reflects less fear of the virus by the German population. The services reading for Germany in climate, current conditions and expectations all stepped up on the month, but also rising sharply was the Markit reading on the services sector. This is the sector that tends to respond the most to changes in the virus and we can expect that it also will be the litmus test for economic responses drive by changes in attitudes toward the virus.

However, retailing, while improving, is also a lagging sector in the IFO framework that needs to improve to play catch-up. This limits the conclusion that the changing attitude on the virus may be driving these responses. Retailing climate did gain substantially month-to-month, but current conditions only made a modest rise (one tenth of a tick higher, rising to -1.2 in February from -1.3 in January) while the expectations reading pushed strongly higher rising in February to -5.5 from -16.9.

There are two concepts at work here. One is the assessment currently of the change month-to-month. The other is the historic standing of activity levels in the various sectors. Overall, the standings show climate at a solid 78.5 percentile mark while the current standing is at its 51.2 percentile and expectations are only at their 51.7 percentile. The climate reading is quite solid by itself while the current and expectations readings are only at a thin margin above their respective median values on data back to 2005. The current standings for retailing and services are below their median with readings of 42.0 for retailing and 25.4 for services- their respective historic median occur at rankings of 50.0. Thus, both of these show below-par readings. Wholesaling and construction show solid/strong readings with construction at an 87.8 percentile standing and wholesaling at a 91.2 percentile standing. Manufacturing, once the strongman of this series, has a still solid reading at its 76.1 percentile.

If you wonder where German businesses think they are going, apparently, they wonder too. Their overview ranking is only at the 51.7 percentile mark, just tad above its median (on data back to 2005). The outlook is weighed down by three standings below their medians: a 20.5 percentile standing for construction, a 34.1 percentile standing for services and a 35.6 percentile standing for wholesaling. Boosting expectations above the 50 mark that represents its median is the 58.5 percentile standing for retailing and the 68.3 percentile standing for manufacturing. The 'bad news' here is that no expectation reading is higher than its 68th percentile which suggests that there is no real pent-up optimism. There is some optimism but no significant optimism. And this, even though there are signs of the virus slowing, being less lethal, and putting fewer in the hospital.

Over one, two and three months, climate readings have improved on back across all sectors as well as for current conditions and business expectations in the aggregate. But over four, six, seven and eight months, there are sector declines as well as mixed declines for the current and expectations indexes.
by:Robert Brusca
|in:Economy in Brief
United Kingdom| Feb 18 2022
U.K. Real Retail Sales Bounce Back and Look-Ahead on Orders Is Positive
U.K. retail sales rose 2% in January after falling by 3.4% in December. Still, sequential growth rates for nominal sales decelerated from a 16.5% pace over 12 months to a 4.4% pace over six months to 2.2% over three months. Spending on beverages & tobacco as well as on clothing & footwear shows decelerating growth rates.

Retail volumes also show sequential deceleration. Volume sales rise 1.9% in January after falling by 3.9% in December. The sequential pace of sales falls from a strong 9.1% annual rate over 12 months to -2.7% over six months and to -5.3% over three months.

In the quarter-to-date, nominal sales rise by 2%, but sales volumes are falling at a 3.2% annual rate.

We can also rank the year-on-year growth rates for sales; the rate ranks at a very high 98.8 percentile. For sales volumes, it ranks at the same high 98.8 percentile. That is good news, but it is undermined by the trends.

The progression for sales shows a slowdown except for registrations for passenger cars. Car purchases have surged at a 48% rate over three months. Passenger car sales are strong in the quarter and rank high in terms of their year-to-date rate of growth. But it is only a partial offset to slowing retail sales overall.

Surveys for retail sales are slightly less robust in terms of their long-term percentile standing. The CBI survey for retail sales for this time of year (a sort of seasonally adjusted view) has only a 19-percentile standing, in the lower one-fifth of its historic queue of data. Consumer confidence has a 26-percentile standing, at the border of the lower quarter of its historic queue of data. The volume of orders year-on-year does better with a queue standing at an 80.6 percentile.

The surveys show quarter-to-date declines in all the survey metrics in the table including consumer confidence. The data on sequential changes are not getting worse at a progressively worsening pace, but the changes in the survey metrics do erode over six months as well as over three months- just not faster. The six-month erosion is a reversal of gains made over 12 months and over three months. That erosion continues at nearly the same pace. Only for consumer confidence is the pace of erosion lessened over three months.

In January and December, however, there is ongoing erosion for the retail surveys and for consumer confidence.
by:Robert Brusca
|in:Economy in Brief
Ireland| Feb 17 2022
Irish Inflation Cruises Above the Speed Limit
Ireland's HICP rose by 0.4% in January, the same as its gain in February. Ireland is another piece in the puzzle that looks to discover what has caused this inflation; it is everywhere. Its domestic consumer price measure rose by 0.4% as well for the second month in a row\, but the core measure slowed to a gain of 0.2% in January after rising by 0.4% in December.

Overall inflation is trendless, but both the six-month change at 7.1% and the three-month pace at 5.8% are ahead of the year-on-year gain at 5.0%. The domestic CPI and its core have the same set of features with an acceleration over six months and slowdown over three months but with both the three-month and the six-month pace more than the 12-month pace.

However, the diffusion statistics are not worrisome. They show a breadth of inflation over 12 months (compared to 12-months ago) at 58.3. Over six months the diffusion measure that compares six-month to 12-month inflation is up to 0.66, which is a high reading for diffusion. That reading says inflation is accelerating in two-thirds of the categories. But then, over three months, which makes the comparison to the six-month pace, diffusion is only at 0.50, a dead neutral reading showing acceleration and deceleration forces are balanced.

Still, there are some trends by categories: alcohol and clothing & footwear both show steady acceleration in prices – for alcohol it's a strong move higher. Health care costs show a minor acceleration tendency, rising from a 1.1% gain over 12 months to flatten at a higher 1.5% pace over three months and six months. Education costs also step up steadily but still post the second slowest three-month gain among all categories. The lone steady deceleration in price is from the catch-all ‘other' category.

Four categories show weaker three-month gains than 12-month gains while one category shows the same pace for 12-months as for three-months. Seven three-month gains are at a pace that exceeds the 12-month pace. The headline shows a three-month gain more than the 12-month pace by 0.8%. For the domestic CPI the increment is only 0.4%, but for the core it is 0.9%- nearly one percentage point. The average gain across all components (unweighted) is 1% but the median is +0.4%. So, there is inflation in Ireland; it has accelerated somewhat broadly, but not all that strongly...yet.

On balance, Ireland does not seem to have virulent inflation problems. The 12-month acceleration compared to 12 months ago is large at +5.2% and the domestic headline echoes that number. But the domestic core rate accelerates by 2.3% year over year-ago. The headlines clearly show the impact of commodity and oil prices that are still gaining but not by as much. Core gains remain more muted, but will they continue or step up in the wake of those headlines? That's the issue.

Ireland poses the question of whether inflation is bad or was it bad? The three-month pace of 5.4% and 3.9% logged by the domestic headline and core, respectively, are well above target but do not look threatening. The momentum is not threatening either. The three-month diffusion is balanced.
by:Robert Brusca
|in:Economy in Brief
Europe| Feb 16 2022
Euro Area IP Gains 1.2% in December As Most Members Show Gains
EMU industrial production gained 1.2% in December after rising by 2.4% in November- a clear solid gain and offset after October's drop of 1.5% and a run of four previous months in which output fell in three of four months. In 2021, output declined in 5 of 12 months; it was a mixed year for manufacturing despite there being a solid net gain for output of 1.5%. All sectors saw year-on-year gains except for capital goods where output declined by 2.4% over 12 months.

Overall output is not accelerating in a formal statistical sense, but output in manufacturing is over that hurdle with solid growth of 1.7% over both 12 months and six months that steps up to a pace of 10% over three months.

The annotations in the table track the EMU manufacturing PMI. It has been somewhat erratic and is lower in December and was lower in October, but it rose in November. The PMI fell on balance over six months and three months but is stronger over 12 months.

The quarter-to-date column is now for the completed fourth quarter that shows a decline in activity despite a strong final two months. This calculation (to remind you...) is executed on the Q3 quarterly average for the IP index vs. the Q4 average (it is not a three-month change). Weakness late in Q3 helped to depress the level for output in Q4 despite two strong monthly gains, leaving the average level in Q4 below the level in Q3. Manufacturing output also is weaker in Q4, falling at a 1.5% pace. The weakness is mostly on the back of weak consumer goods output and that is due to weak consumer nondurables output.

By sector, consumer goods show sequential weakness created mostly by weakness in nondurable goods. Intermediate goods are without a formal trend- but do show a very strong gain over three months. Capital goods show a strong rising trend accelerating from 12-months to six-months to three-months and running at a double-digit growth rate of 22.8% over three months.

All sectors in the EMU have recovered relative to their pre-Covid levels of activity. All are showing gains, albeit small ones over that nearly two-year period.

Country trends The table also presents manufacturing IP data for 12 EMU members and two non-EMU members. Unlike the overall sector data for the EMU, some countries have not fully recovered from their Covid setback. Among the 12 EMU members, six still have output trailing its level of February 2020 before Covid struck. One of the two non-members (Norway) is also weaker on balance. Among those members that are weaker on balance are Malta, Germany, France, Portugal, Luxembourg, and Spain.

On the month only four countries report weaker IP and three of those are EMU members: Austria, Italy, and Malta. Five EMU members showed declines in November and three showed declines in October.

EMU member growth is solid over various periods as well with only three members that are net weaker over 12 months, four weaker on balance over six months and three showing declines over three months. However, in the quarter-to-date, there are six EMU members that show output declining relative to the third quarter.

The chart at the top shows output is getting past its rundown deceleration phase in the wake of its Covid hammering then explosive rebound. But this is a nascent rebound. Capital goods, a sector that was hit hard, is now gathering a strong rebound. It has monthly growth of more than 1% for three months running. That is more impressive than having growth promoted by a single explosive month. Other indicators also suggest that investment demand may be picking up. In the early stages of Covid recovery, there was so much slack that capital investment was not on the front burner. Now, as supply issues continue to loom and demand continues firms, apparently, are ready to commit to new investment again for something other than hand-to-mouth survival.
by:Robert Brusca
|in:Economy in Brief
Global| Feb 15 2022
ZEW Overview Sees Stronger Conditions, A Mixed Growth Outlook and Less Inflation Worry
Table ZEW Qualitative Assessment identifies the main trends of the month; colors help to discern general magnitudes of importance. The economic situation is shown to be stronger for the EMU, Germany and the United States in February, compared to January levels. However, Germany has a level of improvement that still leaves it below its historic median (below a rank standing of 50- hence the red color).

Economic expectations are stronger for Germany and weaker for the U.S. where the Federal Reserve is making noises about being much more aggressive than the European Central Bank. However, the ECB has recently changed its tune from no new music in 2022 to perhaps a new note- but not a symphony like the Fed seems to be planning. So the ECB has abandoned its view that inflation - which is excessive- will slowly, organically, dissipate, and all will live happily ever after, while the ECB simply watches from a front row seat.

And expectations for inflation are higher across the board although they all come with values well below their historic medians. In fact, inflation expectations, while higher in each case, are higher by very small amounts that leave those expectations at very low historic standings. The sense of increase is there; as always, we wonder if it is a turning point or just a point of inflection.

Part of the reason for still low inflation expectations is the expected path of short-term rates, a euphemism for what central banks are expected to do. Short-rate expectations are stronger; in fact, are at a very high standing for both the U.S. and the EMU. Yet, long-term rate expectations are split- higher for German and weaker for the U.S. Still, that response is deceptive since both the U.S. and Germany have extremely high standings for their long rate expectations. The mixed changes on the month don’t seem to tell the real story. Part of that story is real since the level of rates in Europe generally is so low that ZEW experts may be espousing the view that even if the Fed hikes rates faster -and faster than in Europe- the impact on U.S. long rates will not be very pronounced.

One thing that the Fed worries about is that if it hikes the Fed funds rate significantly the impact on U.S. long-term rates will be muted. Since U.S. rates are already higher than in Europe, further increases may spur capital flows into dollars to invest in rising U.S. long-term rates and that could cap the Fed’s ability to bring pressure on long rates reducing the efficacy of monetary policy. It certainly complicates the outlook, but that has always been the case. Long-term capital markets are connected, and such pressures are part of what domestic monetary policy must learn to live with. The ZEW experts seem to acknowledge it.

Stock markets have been strong and have been the beneficiaries of interest rates so low that many investors have sought refuge in stocks as the only place to earn a real return on investment. Stock expectations by ZEW experts are mixed with the U.S. and Germany stronger and a weaker response for all of the EMU while Germany and the EMU lag below their historic medians. The U.S. itself is on the edge and barely above its own median.
by:Robert Brusca
|in:Economy in Brief
Germany| Feb 14 2022
Inflation: Is That All There Is? Or Is there More?
Different strokes for different folks The ECB has been under growing pressure and criticism for its lackadaisical approach to inflation. As the year began, Christine Lagarde assured everyone that policy was in control and that there was no reason for a change in policy in the year ahead. But then as the month of February began, a different view was expressed opening the door for a policy move. The new view is that “Inflation is likely to remain elevated for longer than previously expected but to decline in the course of this year” (Christine Lagarde, here). So, the ECB views risks as more tilted to the upside. The days of stonewalling the excesses of inflation in the EMU are gone. But it is not clear how much policy action will now be employed to face what is a substantial overshoot in the monetary union that is ongoing with more risk than previously believed. The ECB is no longer saying a policy rate increase this year is very unlikely. So much for what in the U.S. they call ‘forward guidance.’

The Fed burned that bridge a while ago although it is far too soon to say that the ECB is now going to walk the same walk as the Fed. It certainly is not talking the same talk. But now the policy-change door is open.

The ECB had previously focused on how inflation would run-off and how some of the very factors causing inflation to rise would eventually cause to slow. Now that view seems to apply only to the letting off some steam and not able to achieve a full-blown return to target by itself.

Still, in Germany, the largest economy in the EMU, the January HICP and core rate both had made a clear turn to a lower rate of expansion (both still quite excessive relative to the EMU-wide target rate, of course).
by:Robert Brusca
|in:Economy in Brief
Finland| Feb 10 2022
Finland's Output Gains Strongly in December
Finland sent 2021 out in style as its 3.1% gain in industrial output in December demonstrates. The gain is part of a series of indicators that now stretches back for six months. Output in Finland is gaining at a 17.3% annual rate over three months, part of an ongoing acceleration from 12-months to six-months to three-months. Utilities and manufacturing also follow this patten of sequential acceleration.

Mining and quarrying output is super-heated but not accelerating since its pace of 84.5% over six months is well ahead of its extremely strong pace of 44.2% over three months. Food production slowed over six months but growth in food output over three months is much stronger than over 12 months. And textile output has simply been gaining pace steadily from 12-months to six-months to three-months.

In December, all sectors and industries showed not just solid but strong gains. By comparison, November and October were a bit more uneven in their span of results.

Inflation has run hot in Finland as it has elsewhere in the EMU. Headline HICP inflation has asserted itself, rising from a 3.2% pace over 12 months and six months to 5.0% over three months. Core inflation has ridden up from 1.9% over 12 months to 2% over six months to 3.1% over three months. Compared to the EMU, Finland's trends are muted. Moreover, in December despite the heat in output from industrial production, inflation has cooled in with the headline dropping by 0.2% month-to-month and the core rising by just 0.1%. Finland's results are what the ECB and the Federal Reserve want desperately to see in their macro data. But the U.S. data for January show inflation acceleration. Finland is a special case.

Growth in the just-completed fourth quarter was strong at 11.2% for overall IP; all sectors were strong except for food where production slipped at a 0.8% annualized rate in the fourth quarter.

The chart at the top of this report shows the level of IP in Finland and how it has performed. The table calculates January 2020 to date data on performance. The ratios in the table show that IP has gained sharply since just before Covid struck (except for mining and quarrying). And the chart affirms the strength in the output rebound. Finland looks to have completely recovered (even relative to trend!) from the Covid smackdown. However, output is still undershooting relative to its previous trend because Finland was hard hit in 2019 when there was a global trade slowdown in the wake of the Trump tariffs on China. Finland still is not back from that set-back. But it is doing well, and it seems to have put the economic impact of Covid behind it despite ongoing infections.
by:Robert Brusca
|in:Economy in Brief
Italy| Feb 09 2022
Italian IP Is Set Back in December
Italian IP was set back in December, shedding about half its gain from November that was itself a rebound from a decline in October. The headline for IP now shows an erratic recent pattern across months and sequential growth rates over 12 months to six months to three months that show steady deceleration. Moreover, the decelerating patterns permeate the three main sectors of IP: consumer products, capital goods and intermediate goods. Italy's slowdown is broad-based across manufacturing (although the transportation sector bucks the trend on strong growth in output over the last three-months- both for three months on balance as well as for each of those three months).

The chart lays out a slightly different path and shows how Covid has dominated the recent behavior in IP, crushing it in April 2020 and then that deep depression in the timeseries laid the groundwork for the spike in April 2021. Emerging from all these distortions, IP has since settled down. IP, often a volatile series in the best of times, has logged increases month-to-month in eight of the last 13 months with one month showing no change in output. That puts the monthly expansion contraction ratio at 2:1. Over that stretch, the average monthly percentage change in output has been 0.4% which is quite good since IP data are expressed in real terms.

However, three of those monthly drops have come in the last five months as well as one month of unchanged output. There has been only once increase in five months, in November. In fact, November saw the first increase in output since June 2021. Clearly momentum is authentically being lost.

In the quarter-to-date (QTD – which is now a completed Q4 reading), output is falling for the headline and for all sectors except consumer goods. The consumer goods rebound may reflect catch up more than strength; consumer goods and capital goods are the only major sectors with output in January 2022 still lower than it was in January 2020. However, the consumer goods sector has been strong. Consumer goods is the only sector that despite slowing sequentially logs no negative results and posts the strongest gain of any sector over six months and 12 months as well as over three months.

Assessing output growth over 12 months using historic results back to January 2000, year-on-year manufacturing trends rank strongly. The headline is at 83.7% and consumer goods stand at their 97.3 percentile. Capital goods, at their 51.1 percentile, are barely above their historic median (that occurs at a 50% ranking). Intermediate goods stand at their 70.5 percentile. Manufacturing growth is doing well over 12 months, but it is decelerating.

These ratings on actual output reinforce the message from surveys on industry and business in Italy for the same span. The EU industrial confidence reading has been higher on this timeline less than 3% of the time. Current orders for Istat have been stronger less than one-half of one percent of the time. The Istat outlook has been stronger only about 15% of the time. Surveys reinforce the current IP readings on strength.

The three indicators at the table bottom show very strong gains over 12 months but revert to much smaller gains over six months and three months. That is not surprising since these rankings presented here are for these indicators as levels and levels have not changed very much over three months or six months. The surveys show levels about as high as they have ever been (see rankings), a least for two series. It is natural that when a diffusion survey approaches such a height its gains slow.

The message here is that Italian industry still has strong output and confidence, but that momentum has been ebbing. There is no pessimism here. There may still be lingering concern about what the virus will allow going forward, but sector diagnostics remain upbeat.
by:Robert Brusca
|in:Economy in Brief
Japan| Feb 08 2022
Japan's Economy Watchers Index Is Slammed in January
Japan's economy watchers index for January fell sharply with the current index falling from 57.5 in December to 37.9 in January. The future index fell as well, shedding its 50.3 reading in December in return for 42.5 in January. The current index fell month-to-month by 19.6 points while the future index fell by 7.8 points. On the face of it, the current index fell more sharply. But on closer inspection, it didn't. Ranking all month-to-month changes in the current and the future headline indexes over the last 100 months puts the monthly change for the current index in its lower 38th percentile- it falls more than this month to month about 38% of the time. However, for the future index, a drop of 7.8 points month-to-month or more occurs only about 14% of the time. So, the drop in the future index is actually rarer and shaper when compared to historic tendencies. Japan's economy watchers have not only discounted current performance but have done so with a significantly darker view of the future. This is not a one-off decline that takes the current reading lower but envisions a relatively quick rebound. It is something much darker.

Apart from the month's changes, the standing of the current index is now quite low, in the lower 13th percentile of its historic range of values; the future index is a slightly stronger at its 20th percentile. In the current array of standings, corporate manufacturers have the strongest percentile rankings followed by nonmanufacturing corporations with the overall employment ranking coming next. Corporations generally fare better than business by specific industry. This suggests that smaller businesses may be seeing more weakness.

As for the outlook, corporations involved in manufacturing are strongest by a large margin followed by assessments of employment and, after that, expectations for eating and drinking places. This ranking is quite different than for the current rankings.

The eating & drinking places ranking switch- and by that I refer to the industry being the weakest current assessment and yet the fourth strongest assessment in the future profile- looks like a classic response for a period in which Covid has struck depressing current conditions but not denting the expectations for the future by as much. And indeed, eating & drinking places have lost 42.2 diffusion points of value in the current index over last three months shedding 40 of them in January alone. Meanwhile, the future reading fell by about seven points month-to-month but has lost 17 points over three-months. Services lost about 30 points month-to-month in the current reading and 9 points in the future reading. Services lost 28.8 points over three-months in the current framework compared to 18.6 points in the future. But unlike eating & drinking places, services rank 9th in the current index setting and even weaker at 10th in the future setting. By ‘ranking' I refer not to ranking the raw diffusion reading values, but to ranking the components again on their queue standings (or timeseries ranking) presented in the last column of the table. Each industry should be ranked relative to its own historic experience. Diffusion value levels cannot be directly compared and even changes month-to-month need some perspective (as we saw at the top of this report).

On balance, we see that Japan's economy watchers index is weak in January. It shows some elements of a Covid strike (weak current reading with less weakness in the future); at least there is that effect on display for eating & drinking places (it is unique among sectors in that regard). And there is some resilience for manufacturing, for corporations generally and for the current situation as well as for the evaluation of employment. But the service sector broadly shows more concern about the future. Japan, like everyone else, has worries about the Covid virus, but its concerns about the future appear to be more deeply seated.
by:Robert Brusca
|in:Economy in Brief
Germany| Feb 04 2022
Domestic German Orders Show Surprising Strength
German domestic orders jumped in December, rising by 11.7% month-to-month (yes, that's month-to-month) and driving the year-on-year gain to 11.0%. This result compares to foreign orders that fell by 3.0% (after a strong 6.5% gain in November and an 11.3% plunge in October) as foreign orders are up over 12 months by just 2.1%.

Foreign orders show sequential deterioration with the annualized growth rates falling from 2.1% over 12 months to -2.4% over six months to -29.6% over three months. Foreign orders in addition to this secular deterioration have become extremely volatile in the last few months.

Domestic orders, in contrast, have no trend and are simply volatile. They are very strong in December, and they impart that strength to the three-month growth rate that surges at a 73% annualized rate. That is up strongly from -5.8% over six months and that was a deceleration from +11% over 12 months. By tenor, domestic orders slow then surge – no trend there. We do not know whether to treat this month as a one off (probably) or as the start of a new, stronger, trend (possibly).

Volatility was up, fell back, but is rising again The data on volatility show that the standard deviations of month-to-month percentage changes in foreign vs. domestic rates of growth have been highly correlated since late-2018. The correlation coefficient over that period (run on overlapping 12-month periods) is 0.972 (R-square of 0.945). Both series show a sharp ramp up in volatility starting around March 2020, peaking around June 2020, and holding at that very high level until March 2021. Volatility fell to a low in July 2021 and since then volatility is up again by about 85% from its recent low. That 'low' was still more than 100% above the sorts of volatility numbers that had been generated (which were very stable for both foreign and domestic orders) prior to Covid striking. Current foreign volatility has crept up higher than domestic volatility (despite this month's 'appearance'). Prior to Covid striking, the volatility of foreign orders was steadily and consistently higher than that for domestic orders by about a factor of 100%. That relationship appears to be in the process of being returned but with both volatility measures at a higher level.

With higher volatility, the signal to noise ratio falls. It will be harder to detect changes in trend and we will have more instances of spikes that are large and that are meaningless as they go away in future months. From April 2021, the percentage gain in foreign orders led the order parade with few exceptions but in December that is switched. Will it stay that way or is this just the result of volatility? In fact, since January 2008, foreign orders (based on year-over-year growth) have been stronger than domestic orders 63% of the time. And foreign order growth year-on-year seems to be weaker than domestic order growth (correlation coefficient 0.61) when overall order growth is negative. So, this inversion of strength between domestic and foreign orders may also be a signal of developing weakness even though orders are still up year-on-year. Remember that foreign orders are trending weak.

These correlations are 'interesting' for several reasons. Germany has the largest economy in the EMU. A large proportion of German exports stay within the EMU block. This month, orders from within the euro area fell by 4.2% with orders from outside the zone falling by 2.3%. While German domestic orders were strong- in an economy that is very export-dependent and sells a lot within the EMU as well - orders from EMU trade partners were weak. This confluence of relationships seems to ensure that domestic and foreign order series are not going to drift to far apart except in the short run, as they have done this month.

As for product type in December, consumer goods orders rose by 5.3%, intermediate goods orders rose by 4.1% and capital goods orders rose by 1.8%.

Real sales data in the bottom panel of the table show manufacturing sales rose by 0.2% on the month and those sales have been expanding at steady and strengthening rates from 12-months to six-months to three-months. In fact, the component sales data all show sequential acceleration except for consumer nondurables goods (and they pass that exception on to total consumer goods) as consumer durable capital good and intermediate goods sales all show sequential acceleration. All the accelerating series show power gains over the recent three months

The industrial sector data from the EU Commission on Germany, France Italy, and Spain – fellow EMU members- shows all of them with accelerating industrial sectors despite the drop in foreign orders and the weakness in the EMU-only orders.

Quarter-to-date (QTD) QTD orders show a strong 8.6% gain as the quarter finishes with foreign orders weaker, falling at a 3.9% pace and domestic orders popping at a 28.8% annual rate. Real sector sales show huge gains in manufacturing led by a very strong rebound in capital goods for the quarter and followed by a double-digit growth rate gain from intermediate goods.

Pre-Covid comparisons Comparing sales and orders to their pre-Covid January 2020 levels finds domestic orders up by 15.4% with foreign orders up by only 0.9%. Real sales are lower by 2.4% in manufacturing with shortfalls all around except for consumer durables and intermediate goods.

EU Commission index The EU Commission indexes show strong queue standings in December in their upper 90th percentiles for the most part for the industrial sectors of Germany, France, Italy, and Spain. All these metrics show double-digit gains from their January 2020 levels. Germany leads the group with a gain of 38.1 points; the rest show gains of from 10 points to 15 points.
by:Robert Brusca
|in:Economy in Brief
Global| Feb 03 2022
Services PMIs Show Broad Weakness in February As Do Composites
The Composite PMI and the Service Sector The PMI readings globally are not as comprehensive a set of data as for manufacturing. Still, there is a broad rather representative group of data we can observe to track the overall PMI and the global service sector. In January, among the twelve reporters of service sector data, eight weakened showing that weakening members outnumbered strengthening members two to one. That is decisive. In December, nine members weakened month-to-month. That compared to eight weakening in November.

The service sector globally These monthly changes demonstrate (data not shown separately) that the service sector has been under siege over the last three months with declining sectors outnumbering advancing sectors by a factor of at least two to one for three months running. That is 'impressive' in a negative way.

The chart shows that among the countries and the EMU region whose data are plotted there, the U.S. has been a very different animal with the service sector building to a crescendo while the other service sectors ran either a more restrictive cycle (like the EMU) or simply waffled while moving mostly sideways (Japan shows a bit more uptrend than the EMU or China).

The service sector ranks below its median (on data from January 2018 to date) in eight of twelve sectors with those below their median outnumbering those above their median by two to one again. The relative strongest service sectors are in Brazil (83.7%) and Canada (72.2%). Among the world's four largest economies (the U.S., China, Japan and Germany, the strongest standing for a service sector is Germany at its 36th percentile). Among the twelve global service sectors, eight of twelve have weaker PMI values than their level before the Covid virus stuck in January 2020 (one country, Brazil, is unchanged). The only countries with higher service sectors on that timeline are Canada, France, and the U.K.

The Composite PMIs The service sector usually dominates the composite reading but the composites are more comprehensive, and more countries report a composite PMI than report both individual sectors. Twenty countries report an up-to-date composite PMI in the table.

In January, the composite PMI slows month-to-month in 16 of 20 jurisdictions but dips below 50 (the diffusion boom-bust line) in only six (30% of reporters). The median reading is 51.0, a skinny gap between the median and the boom-bust line.

There has clearly been a worsening in the last two months when the proportion of reporters showing deterioration has risen sharply and stayed high. This is probably a result of the highly transmissible Omicron virus, although some health experts are now concerned that Omicron may not have spread as widely as initially suggested and there may still be a good deal of Delta in the mix. This just points out how much health authorities are stabbing in the dark at a moving target. The U.K. does a great deal of detailed testing. The U.S… not so much, and the tests that the U.S. deploys often only test for 'Covid-19' not for the particular variant. And lot of what we 'know' about the virus is still derived from models and if there is anyone who knows how dodgy depending on a model can be, it's an economist. The initial 'model results' given around Christmas by a U.K. group for the spread of Omicron in the U.S. appears to have been 'overstated.' So, we will have to listen to the health authorities to see what they tell us. Whatever is going around, it is spreading fast and it may be a mix of Omicron and Delta.

A world of 'hurt' Whatever is going on in the world of virus, it is affecting the world of economics and has had a large impact over the past two months. Infection curves are now dwindling (GOOD NEWS!) and although deaths are low relative to infections the infections have been so broad-based that in raw numbers the deaths have been high.

Virus impact on economy Obviously, what happens next is going to depend on what the real virus facts are and where we go from here. The virus has an outsized impact on the service sector since that sector puts a premium on face-to face contact and people who are engaged in heavy mitigation strategies simply avoid as much contact as possible. They stay home. They let other people shop for them. They use the internet, and so on… I live in NYC on the Upper West side of Manhattan, a densely populated area. I see a less grocery store shopping, less traffic on the streets, fewer people on the street, a less crowded subway system. People are mitigating or maybe migrating or even hermitting. Even though they still shop, that behavior hurts growth.

Diffusion data, queue rankings and high-low percentile readings The global composite PMI data show several interesting trends. I just wrote on the deterioration in the last few months. But note the queue standing column in the table…what is going on there? An average standing of 43% means that on average reporters are significantly below their median (medians occur at a queue ranking of 50). Now this is different from the median of the diffusion data which is at 51 and shows a very small tendency to expand (PMI values above 50 signal expansion; values below 50 signal contraction; on the queue ranking data 50% identifies the MEDIAN value of the underlying diffusion value). But these two readings are not incompatible -in fact together they enhance our understanding of events. As a final matter, the column labeled percentile provides the percentile standing of the month's observation in its range- between the sample high and low. A 50% reading on that is simply the middle of the high-low range.

Making the metrics work together One of these metrics, the median, points to a barebones expansion; the other (queue standings) says that countries are posting results well below their historic medians. These two findings are quite compatible; in fact, a barebones 'skinny' PMI level just above 50 is also below most nations' medians (in almost all cases). We can also see that the percentile column shows an average across reporters of 78% and a median of 82%. Again, that is compatible with the other two results. What the table shows is that there is only one reading in the top 10 percentile of its historic high-low range of values (Sweden). However, there are 12 of 20 readings that are in their top 20th percentile on this gauge. While there may be broad queue percentile standing weakness, there is not deep high-low weakness.
by:Robert Brusca
|in:Viewpoints
Europe| Feb 02 2022
Is EMU Inflation Too Hot?
Table 1
by:Robert Brusca
|in:Viewpoints