Business confidence in Italy is still at a reasonably strong reading. The index fell this month to 93.3 from 95.9. The month’s drop is relatively sharp. The chart pattern for the index is much more ominous than for most EMU members. Italy has been the weakest of the large EMU countries for some time. We maintain that the place to look for vulnerability to the strong euro value is not in the EMU’s strongest economy, Germany, but in some of its weaker members. Italy is a case in point.

Percentile readings of the ISAE survey components are mostly in the 60 to 70 percentile range. But residing in the 61.4 percentile of their range, foreign orders are one of the weaker categories. This is a reading that would be expected to get weak if Italy developed competitiveness problems. Consumer goods reading are among the weakest by industry group with percentile readings that fall out of the 60^th percentile in the 50s. But the loss in momentum is greater for investment goods than for consumer goods even though the consumer goods raw readings are weaker in absolute terms.

On balance, Italy appears to have lost a lot of momentum. Its readings are reassuring and are nonetheless still solid. We would start to get more worried about Italy and the hint of the loss in competitiveness if the drop in the index we see this month extends itself in the coming months. For now, it is just a warning and possibly a bit of mid-summer volatility...but also possibly something more.