Economy in Brief

Japan’s PPI data reveal that not all the inflation measures are flashing danger or warning signals. Japan's preferred CPI gauge that excludes energy & fresh food, for example, is one of the hottest gauges of inflation. It happens to be the gauge that the Bank of Japan emphasizes the most and so it has put policy somewhat on edge worried about inflation.

However, the other Japanese metrics are not showing the same degree of inflation that that one is showing. The PPI from Japan was up by 0.2% for the second month in a row in August after falling by 0.2% in June – a very restrained performance. The 12-month inflation rate is 2.7% that falls to 1.1% over six months, then to 0.6% over three months – all at annual rates. For all of manufacturing, the PPI is up by 1.6% over 12 months, flat over six months and then back up to 1.3% over three months; none of these are particularly troubling inflation gauges although I recognize that the PPI is not the CPI and this is not the target of monetary policy.

Still, for Japan, it's reassuring to see that inflation is not simply running wild. In fact, when viewed in several different ways, it's actually rather controlled.

Viewing inflation in Japan and the context of trends in the United States and then the European monetary Union, we find that the broad pressure inflation is concentrated in the U.S. although it may not be tariff-related. In Europe, inflation is broadly controlled. The U.S. is showing the most pressure and of course it has the strongest economy, and it also has an ongoing problem with tariffs that are putting some extra measure of pressure on prices. The U.S. PPI generates a very strong inflation rate over three months - and even an elevated 12-month reading of 3.5%. However, we don't see anything like that coming out of the European Monetary Union where year-over-year inflation is barely positive even though over the most recent three months inflation has accelerated to a 2.2% annualized rate. That's still a relatively subdued rate.

In Japan, the ordinary CPI and the core show relatively subdued inflation over the last year. The headline CPI is 3.1% over 12 months, but it dives under 2% over six months and to a 2.2% pace over three months. Japan's core is only 1.6% over 12 months and its annual rates are under 2% for six months as well as for three months. The inflation situation in Japan, particularly for producer prices, seems to be in pretty good shape with the quarter-to-date inflation rate for the PPI at 0.6% and for all of manufacturing at 0.8%. With oil prices remaining moderate, the outlook for inflation to remain in this more moderate range is still good, and Japan continues to have weak growth; demand should not be putting pressure on inflation. The Bank of Japan should be relatively happy with Japan's producer price number, the domestic corporate goods price index for August.

Industrial output in the European Monetary Union predominantly fell in July as 14 early reporting monetary union or economic union members demonstrated that 8 of them logged a decline in industrial production in July. Sticking to only monetary union members there were declines in eight of the 12 reporting countries – a poor month for EMU members.

For the full group of 14, the median change was a decline of 1% in July after logging a median increase of 0.2% in June and a median decline of 0.7% in May. Sequential results show a median increase over 12 months of 1.4% for this full group, a median increase of 4.5% using annual rate data over six months, followed by a 3-month annual rate median decline of 1.4%.

Over three months among the 14 reporting countries, 8 show increases; however, 6 show declines and the declines that are logged are all large, starting with the decline of 21% at an annual rate in Luxembourg, 13.4% in Finland, a decline of 10.8% in Portugal, a decline of 8.3% in Malta, a decline of 4.9% in the Netherlands, and a decline of 4.3% in Ireland. The countries with declines over three months are experiencing very significant and sharp declines.

Looking at the full slate of countries over three months, only 33.3% are showing output accelerations. That compares to 6-months when only 30.8% show output accelerations; however, over 12 months compared to 12-months ago, two-thirds show output acceleration. Acceleration is fairly broad-based when compared to a year ago, but over shorter horizons there's clearly more of a slowing in progress and less uniformity.

This is early in the third quarter; industrial production data show six countries already indicating quarter-to-date output declines in Q3.

Interestingly, the queue rankings data executed on year-over-year growth rates have become much firmer and stronger. There are only 4 reporting countries in the table with year-over-year growth rates ranked below the 50th percentile: Finland, the Netherlands, Greece, and Luxembourg. The average of the median ranks is at the 64th percentile mark, a nearly top one-third standing. Germany, France and Italy have standings well into their respective 60th percentiles– for Germany, in the 70th percentile. IP growth in manufacturing is scoring out at a more resilient performance level despite the drift into recently weaker growth rates. This will be a trend worth watching.

The end of summer is turning out to be a difficult time for France even though industrial output is in a seemingly solid trend. Output in June rose by 3.5%, it did that after a weak May when output fell by 1.1% and now in July output is falling by 1.6%. By itself, the manufacturing trend is simply not that worrisome, but it is built upon somewhat more convoluted trends with July’s drop. Add this complication to a political environment that is quite difficult as in real time, in September, France's government is being dissolved, the Prime Minister is being dismissed, and President Macron is under pressure. There is a decidedly split and fractured legislature to deal with as he is going to have to appoint yet another prime minister, the second lost government in less than a year. Macron continues to resist calling elections or stepping down himself.

France has been called out by the markets for the size of its government sector and its debt as Macron’s earlier tax cuts produced fiscal deficits not growth. French deficits continue to push up bond yields toward levels being paid by Italy. The U.K. is also under pressure for its substantial indebtedness and its inability to get control of its economy and generate growth. None of these are new trends and certainly not foreign to anyone in the United States where large fiscal deficits, concerns about future fiscal deficits, and President Trump's own concern about deficits as exhibited by his attempt to try to push interest rates down to reduce the interest cost of the debt. This has pushed the fiscal budgeting process into the mainstream of making monetary policy creating a clash over central bank independence in the United States- with reverberations abroad.

The best way to keep debt or the size of the government sector from becoming a problem is to control it and none of these governments seem to have been able to do that. A country that is going to rely on debt and increasing indebtedness is pushing the day of reckoning out on the future generations. That becomes increasingly unpalatable as population growth has been slowing. Slowing population growth and rising debt levels are an extremely bad combination and yet we see these as real international trends.

In France, the one-year trend for industrial production in manufacturing is still relatively solid at 1.5% growth over 12 months, stepping up to 4.5% at an annual rate over six months and up to 8.2% annualized over three months. On the face of these figures, if they hold up, the progression for growth is pretty good. However, when we see what produces these results in the table, which is a sharp drop in May and July, with a sharper increase sandwiched in between, we are left wondering whether the sequential trend is going to hold up at all. Consumer durable goods output trends are one of the reasons that that output trend in manufacturing is so strong with positive growth in May, June and July; the sector logs 12-month growth of 3.7%, 6-month growth at 9.2% at an annualized rate, and 3-month growth at a stunning 17% annual rate. That would seem to be a lot of strength to carry the day, but consumer nondurables output trends point in the opposite direction with -0.6% over 12 months, a -1.2% annual rate decline over six months and then -5.7% at an annual rate over three months. The capital goods sector sides with growth with a 4% rate over 12 months and an 8.5% pace over six months and that largely holds up at 8.1% over three months. However, the sequential growth rate for intermediate goods shows a drop in output of 0.8% over 12 months, a nice rebound with a 3.9% annual rate over six months and then the declining pace of 1% annualized over three months – a bit less coherence.

Transportation output in France is considerably stronger than the trends in motor vehicle registrations. Even though output in the auto sector continues to be quite firm to strong, registrations are weakening. That can’t be good.