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

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
Global| Feb 01 2022
Manufacturing PMIs Weaken in January
Manufacturing PMIs have peaked and have been sliding lower for some months. The peaking and slippage are a slightly different horizon for each country, but all of them are now on downslopes.

In January, the deteriorations exceeded the 'better' responses by a factor of 8-to-5. The change from three months vs. six months shows a nearly equal improvement vs. deteriorating trend. The change from 12 months to six months shows deterioration dominating improvements by a factor of more than 2 to one. But over 12 months compared to a year ago, improvement is the order of the day with 11 improvements logged vs. only 2 deteriorations… Longer term, the beat goes on.

Covid rears its ugly head Once again, the Omicron variant seems to be behind the worsening trend in manufacturing as the less virulent but much more transmissible variant has swamped hospitals with infected people despite its lesser virulence. In this case, transmissibility has trumped virulence to create a potent viral attack on the populations globally. While vaccination helps to mitigate the impact of infection, it does not stop it. As a result, Omicron has been very widespread and even quite dangerous. It is a lesson about how one should view danger.

Vaccines to the rescue...oops not... I suppose one thing we should at some point begin to wonder about is the economy's recuperative capacity after a bout with yet another variant of Covid-19. When Covid first struck, draconian measures were taken by health authorities who were more scared than knowledgeable about what to do. Over time the mRNA quasi-vaccines were developed and for a while they became the path to stronger growth. Eventually health officials discovered that the inoculations had a short 'effective life,' and 'vaccine-boosters' were thought to be needed after six or eight months. It is now understood that the inoculation's immune system stimulants begin to drop sharply after just four months. That is probably not a 'New Reality' as much as it is scientists discovering the real reality. Discovery of this reality makes the quasi-vaccines much less of the backbone of a response system and critics of the CDC complaint that the CDC, which tends to lead the Covid fight globally, did not devote enough resources to other potential treatments. If you put all your eggs in the vaccine basket, that basket better carry the day. (This not an opinion-it is a fact. See Scott Gottlieb at the 39-minute mark of Face the Nation 1/16/22 . - here Gottlieb, who is on the Board of Pfizer notes the failure of the vaccines to prevent transmission. He also blames the CDC – a significant statement from a high-profile industry expert and a former FDA Commissioner.)

Damped recovery prospects? In the past after a bout of virus, there were government support programs and some of those are still in circulation in various places. But government assistance and income supports are now much less common. After this round of Covid, manufacturing and services are going to have to rise back based on whatever organic demand has been built up. There is reason to believe that such build-ups in demand occur after a period of disruption. But the snap back may not have the same 'snap' as in previous episodes of infection followed by recovery.

The state of play for manufacturing The queue or rank standings find only China and Brazil below their historic medians, but these two are below by a huge margin with standings below their 5th percentile in each case. The median occurs at a percentile queue standing of 50%. These are readings far from where they belong.

There is more firmness this month than strength. Japan has a 98-percentile queue standing. Russia Vietnam and the EMU have queue standings in their 80th percentile range. But Germany, France and the U.K. -the top-ranking three European economies- have standings in their 70th percentile queue standing. India and Taiwan are in their respective 60th queue percentiles. Turkey and the U.S. tally standings in their 50th percentile decile. Over 50% of the responses are at the 70th percentile standing mark or above. But still 30% are just in the first decile above their median (50

The responses this month show some mixed statistics, but clearly growth remains the operative descriptor. Yes! The growth has been more moderate than strong, and this is due to this survey being conducted in the middle of another Covid episode. Looking at the cumulative gains since January 2020 when covid struck is also illuminating. The EMU area and Germany have gained double-digit diffusion points on that horizon. The next strongest is the U.K. at +7.3 points and Japan at +6.6 points. Then rising by 3 to 4.4 points are France, Russia, the U.S., Taiwan, and Vietnam. Countries with manufacturing readings below their January 2020 levels are Turkey, India, China, and Brazil – sinking like a BRIC?
by:Robert Brusca
|in:Viewpoints
Japan| Jan 31 2022
Consumer Confidence Dips and Lags in Japan
Japan's consumer confidence diffusion index eroded in January, edging down to 36.6 from December's 38.9. The index is net lower over three months and over six months, but it is up by 6.5 diffusion points over its value of 12-months ago.
by:Robert Brusca
|in:Viewpoints
Global| Jan 28 2022
Tight Money Isn't Funny- But Too Much Growth Can Make You Choke
So... there it is, the paradox of the central banker…How much is enough? How much is too much? How much is too little? What happened to Goldilocks?

Back in the early 1980s, monetary experimentation was rampant. I worked at the New York Federal Reserve Bank back in those early days (1977-1983). My look back at the research and experimental looks at money (M1, M1a, M1b, M2 MZM…L, etc.) leaves me with the feeling that while there was a lot of research there was more investigation than there was learning. Subsequently, the Fed left the quantity of money to the wind and focused more on the price of money by targeting interest rates. But that does not mean money does not matter. It just means that money is not targeted. In fact, the Federal Reserve in the U.S. even STOPPED PUBLISHING M2 money supply numbers weekly. Shame!

The Fed in the U.S. further loosened constraints on itself by claiming to target some (unspecified) average rate of inflation and the ECB followed suit, dropping the less-than 2% objective for a 'higher' (also unspecified) 2% 'average.' So now central banks have a known objective for inflation (2%) which they are evaluating by looking at an unknow benchmark - some average of actual inflation. This, of course, leaves markets more mystified than before because we really don't know what the central bank is looking at to make policy. Since inflation has jumped so much, there is an enormous difference in what you see for inflation depending on which average you look at. And central banks think they are doing a 'excellent job' at communication!

Can we be anything but NOT SURPRISED that all this has led to rampant inflation?
by:Robert Brusca
|in:Viewpoints
Global| Jan 24 2022
Flash PMIs...Flash in the Pan?
Markit PMI flash readings from Markit for January 2022 weakened broadly. The clear exception was Germany where the composite, manufacturing and services readings all bucked the trend to make solid to strong month-to-month gains. Maybe there are additives in the gas in the pipeline from Russia? Or simply catch up since Germany's PMI standings are not standouts. The German gains were strong enough for an improvement in the manufacturing reading to post for all of the EMU due to Germany's large weight in that index. However, the EMU composite and services PMIs weakened.

France, the U.K., and the U.S. saw broad declines with each of the Markit indexes falling on the month. Japan witnesses a small gain in manufacturing with a sizeable fall in services and a step back in the composite. The U.S. fared the worst of all with a large setback in services to couple with a significant setback in manufacturing that produced a much weaker composite as well. The U.S. services drop is the third largest in the past four years and is exceeded only by the spectacular drops logged when Covid struck.

The U.S. is not only the weakest on the month; it is also riding three consecutive months of three sector deterioration and is alone among these reports with that distinction (and U.S. manufacturing extends that to weaken month-to-month for six months in a row). France weakened in all sectors for two months running while the U.K., Japan, and the EMU weakened in five of six month-to month-comparisons over the last two months. While Germany made across the board sector gains in January, it weakened across the board in December.

The monthly data, except for Germany, show a weakening as the color-coded back 'stronger' entries give way to the 'weaker' red entries in recent months. The historic averages which are formed excluding January (e.g., the three-month average is December, November, and October) show (1) predominate weakening over three months, (2) mixed conditions over six months, and (3) those contrast with uniform strength and improvement over 12 months (that is 12-months compared to the 12-month average of 12-months ago).

There are clear country differences as well, however. The U.S. is the only entry in the table with three- sectors weakening over three months as well as over six months. However, all the other members, except Japan, show three-month and six-month weakening for manufacturing alone.

The index standings- both the high-low position and the rank or queue standings show less strength than there has been recently as only Japan has ranking for its manufacturing sector in the 90th percentile decile. In the high-low range the EMU, Germany, and France mount 80th percentile decile standings, the U.K. has a low 70s standing, and the U.S. is just below a 70th percentile standing in manufacturing in the high-low column.

However, the queue percentile standings show less strength indicating that current performance does not stand up well to the standards of the past four years. Manufacturing is an exception with 80th percentile standing in the EMU, Germany, and France with the U.K. in the upper 70th queue percentile range and Japan again in its 90th percentile. The is U.S. alone below its median with a 49-percentile queue standing. The real weakness comes from services where four of the six entries in the table (the EMU, Germany, Japan, and the U.S.) log queue percentile standings for services that are below their respective medians and in most cases below by quite large margin. France and the U.K. are the exceptions here but only with queue rankings in their respective 50th percentile decile range.

This performance is the clear mark of the virus. As manufacturing, for the most part, has held much of its strength and resilience while the rapid spread of Omicron has taken a large bite out of activity in the service sector globally. The U.S. and Japan have been hit exceptionally hard looking at the queue standing assessments.

Services have been hit so hard recently that among the six reporters in this table four of them have service sector readings that stand below their pre-Covid readings of January 2020. The two exceptions have little to brag about since the U.K. is higher than its January 2020 level by only 0.4 points in services, while France is higher by 1.4 points. That's not much gain over a 24-month period.

Average manufacturing standings for this group are at the 79th queue percentile in manufacturing but only at the 36th percentile for services which is the jobs sector. The composite index averages a standing in its 46.6 queue percentile below its median.
by:Robert Brusca
|in:Economy in Brief
France| Jan 20 2022
French INSEE Survey Scores Solid Marks with Mixed Momentum
France's INSEE industry climate reading spurted to 112.4 in January to start the New Year from 109.7 in December despite an assault across Europe by the Omicron virus and some sharp words for the unvaccinated from French President, Emmanuel Macron. The French service sector, however, stepped back to 104.8 in January from 107.4 in December, marking a two-month drop of more than 13 index points, a very sharp pull back. We know that the service sector is more vulnerable to viral outbreaks, so my working hypothesis is that the virus smacked the service sector hard, but the manufacturing sector is signaling that growth is still in the groove. We will, of course, monitor French data closely to see if this is confirmed in forthcoming data releases.
by:Robert Brusca
|in:Viewpoints
Global| Jan 18 2022
ZEW Survey in January Sees Mixed Momentum and Higher Interest Rates
The ZEW experts' macro conditions readings for January show deteriorations for Germany, the EMU, and the United States. The German reading logs in at -10.2 in January while the EMU logs a reading of -6.2. In sharp contrast, the U.S. logs a reading of +41.1 (diffusion readings for individual reporters are not shown here). Germany has a 44.6-percentile queue standing, the U.S. has a 57.4-percentile queue standing and the EMU has a 64.3-percentile queue standing. Among the three assessments, only Germany, with a standing below its 50th percentile, is performing at a pace below its median.

Economic expectation readings are available for Germany and the U.S. Germany has the higher diffusion reading at +51 (not shown) while the U.S. has a +22-diffusion reading. This translates to a 72-percentile queue standing for Germany and a 60.5 percentile queue standing for the U.S. Both are above their respective medians for the period (the median occurs at a ranking of 50). And the diffusion reading for both Germany and the U.S. rose sharply on the month.

The early take on the ZEW outlook is that expectations have held their ground in January even has macro conditions assessments have slipped a bit. This may be an acknowledgement that the virus set back some activity in January but is not expected to continue to have that effect going forward.

Inflation expectations are negative in January and are lower on the month in the EMU, Germany, and the U.S. This is an interesting finding since inflation has been flaring and it is and has been troubling and excessive relative to the ECB target as well as the U.S. inflation target. However, what inflation is and what it is expected to be are different things. Inflation expectations peaked around March 2021 at diffusion values in their 80s for the EMU, Germany, and the U.S. In January these expectations are coalescing around a diffusion value of -40… as actual inflation has flared expectations have pulled back. While central bankers have played dumb about inflation (see no inflation, hear no inflation, speak of no inflation – and expect it to go away on its own), the ZEW experts were right on (prescient) and foresaw this blast in the making. The ECB for now seems unconcerned and is of the belief that no policy change is required, and that inflation will simply deflate. Or maybe even Godot will show? In the U.S., the central bank is making preparations to hike rates by winding down and eliminating asset purchases and signaling that it expects to raise rates multiple times in the year ahead.

Not only were ZEW expectations on inflation elevated earlier, but ZEW respondents now see central banks as closer to acting to contain it (I guess that would be despite some official pronouncements to the contrary). We can compare responses to the levels of those same responses of last year when ZEW inflation expectations were elevated. At that time, short-term interest rate expectations hovered near 10 for the U.S and the EMU. The expectations for the EMU are up to a diffusion value of 25 while the U.S. is up to 81. A net rise of over 70 points for the U.S. and a net rise of about 13 points for the EMU. So it appears that the ECB's declaration on rates is holding back ZEW expectations. Still, the ranking for rate hike expectations in the U.S. and in the EMU are high at the 74% mark in the EMU and the 84-percentile level in the U.S.

Turning to longer term rates, there are extremely high percentile standings for long-term rate expectations in both the U.S. and Germany. However, the average shift in expectations is smaller for long-term rates (+10) than for short-term rates (+20). This suggests – and the above responses are consistent with this - that ZEW experts expect rates hiked at the short end to be more powerful than the rate rises in the long end or at least to be sufficient to stop inflation. And this is reflected in the way inflation expectations have been pulled back as we saw. The monthly change in long rate expectations was higher in the U.S. this month than it was for Germany.

But in this environment the stock market is no longer as favored. Stock market percentile standings are all below 50 indicating a worse than median expectations and the month-to-month decline is an average drop for the U.S., German, and EMU markets of 17 points.
by:Robert Brusca
|in:Viewpoints
United Kingdom| Jan 14 2022
U.K. IP Continues to Make Headway
U.K. industrial output rose by 1% in November after gaining 0.2% in October, marking the first back-to-back monthly gains since February and April.

Output seems to be on some sort of an upswing as three-month growth is at an annual pace of 2.9% compared to nearly identical growth rates of 0.2% and 0.3% over six months and 12 months, respectively. In the quarter-to-date (QTD), output is rising at a 1.8% annual rate. And output still has not recovered to its pre-covid level as it is 1.8% below its level of January 2020.

Sector stories Three of four sectors made gains in November with consumer nondurables as the exception. For these four sectors over the last three months, there are 12 month-to-month changes in output, and among those twelve, five of them showed month-to-month declines. The other seven showed increases. That comparison points out that while output is rising more than falling, the industrial sector is still quite mixed. The longer trends from 12-months to six-months to three-months show no clear trends The overall mostly accelerating pattern actually does not get support from individual sectors, but three of four sectors do have a three-month growth rate above their respective 12-month growth, a sort of 'poor-mans' indication of acceleration. But only two of four sectors show positive advances in the QTD growth: consumer nondurables and intermediate goods. Output is contracting so far in Q4 for consumer durable goods and for capital goods. Sectors also are mixed on the view of recovery from Covid. Consumer nondurables and intermediate goods show output at a higher level in November than in January 2020. But consumer durables goods and capital goods show output lagging their January 2020 performance by 5.4% and 11.4%, respectively. Those are relatively large shortfalls.

The table highlights five industries as well. Among their most recent three-months (where there are 15 month-to-month changes), nine of them show drops in output against only six showing advances. Only one sector shows a clear three-month trend; that is textile and leather goods where growth in output is decelerating. Only one of five industries shows three-month growth faster than 12-month growth- and that is motor vehicles & trailers where the three-month negative growth rate is smaller than the 12-month negative growth rate. Only two of these five industries show output stronger in November than in January 2020: (1) food, beverages & tobacco and (2) textiles & leather.
by:Robert Brusca
|in:Economy in Brief
Japan| Jan 11 2022
Japan’s LEI Marks Second Monthly Rise in a Row
Japan’s LEI rose in November to 103 from 101.5. This is the second increase in a row. As the table shows the LEI took a one-point tumble from 101.2 in August, to 100.2 in September then it rose to 101.5 in October and now to 103.0. This is a nice string of increases. But the steady gains still leave the LEI index below its level of July 2021 when it stood at 103.8. In August of 2021, the index fell sharply. But it has recovered steadily since then.

The table shows the LEI in several different guises and settings along with other economic metrics on Japan’s economy all on the same timelines.

Looking at the increases in these metrics from January of 2020 shows the LEI is up by 14.1%. The METI industry index is lower by 1.4% on this same timeline. The Teikoku indices are uneven with three sectors still below their January 2020 levels (retail, services, and construction) but with wholesaling and manufacturing higher on balance. The Teikoku metrics are quite different from the economy-watcher metrics that show solid and strong gains on this same timeline for all its sectors- each showing a double-digit gain since January of 2020. The Teikoku readings lag the LEI and the Economy-watcher readings.

The LEI has an index level in November with an 88.8 percentile standing. This contrasts to its 76.9 percentile standing when ranked and evaluated on its 12-month growth on the same period. Those differences in rankings are not huge but for an index like the LEI that is based on underlying economic variables that grow over time, the growth metric is more important and more telling than the index level standing. The more meaningful LEI ranking is the lower growth rate ranking.

Compare the LEI ranking to the rankings of the Teikoku and economy-watcher indices. The index level ranking shows economy-watcher indices across the board are high and strong with rankings in their respective 90th percentiles. However, the level ranking for the Teikoku sectors are in the 36 percentile to 65th percentile range, a much lower habitat.

The growth rate rankings over the last 12-months show somewhat more similar rankings. The economy-watcher indices are in a range from the 83rd percentile to the 96th percentile. The Teikoku rankings on growth rates span a ranking of the 49.7th percentile to the 83rd percentile for services and an 81st percentile for manufacturing.

I contrast to these comparisons the METI industrial index has a 20th percentile index level standing and a 76.9 percentile growth ranking. The METI index level reading is weaker than anything else but in growth terms it is on board with the other surveys

There is no truly best index. The economy watcher indices are evaluations of economic onlookers in various sectors. Teikoku is more of a traditional survey as is the METI index. However, all surveys show ongoing improvement over the last three months and show a falloff in August from July as we saw in the LEI. We seem to be getting the same signals from all the surveys on the economy; there is just not one uniform way to map them into a single current standing. Every picture tells a story; every angle tells a different story.

The indices are clear about a few things. Japan’s economy is progressing. On its rate of progress there is some disagreement, but it is progressing. Current evaluations from the LEI, Teikoku, METI, and economy-watchers indices show an ongoing economic improvement and a solid-to-strong standing for the economy itself. At this point it is hard to put a finer point on it than that.
by:Robert Brusca
|in:Economy in Brief