Economy in Brief

EMU money and credit growth contract Money supply growth in the European Monetary Union (EMU) continues to contract over three months as well as over six months and 12 months. In real terms, money supply declines as well on all horizons although the 12-months contraction is at a more severe pace than it is over 3-months and six-months.

Credit in the EMU is weak; it registers weak, but positive, growth over three months in nominal terms. Credit to residents, as well as private credit, both contract over 3-months and 6-months in nominal terms. In real terms, both credit measures decline on all horizons; the pace of the credit decline has slowed slightly over three months and six months compared to 12 months – perhaps a sign that economic excess have been or are being boiled out more than a sign that economic deterioration is getting out hand.

Manufacturing slides as services waffle and ease The S&P PMI flash survey this month is difficult to summarize since its message is split. There are six respondent areas with three sectors each; and of these 18 observations, 9 are stronger this month and nine are weaker – split decision! The three EMU sectors are weaker in October while the three U.S. sectors are stronger. The manufacturing sector is stronger on the month except in the EMU and France. Services are weaker everywhere month-to-month except in the U.S. and in France. The U.S., the U.K., and the French composite indexes are stronger month-to-months while the EMU, German, and Japanese composites are weaker.

Sequential readings: comparing averages The sequential readings are constructed on historic averaged data that do not include flash observations for October; they show weakening across the board – all regions all sectors - over three months. Over six months, conditions are mixed with 8 worsening and 10 improving. France is alone in weakening across all three sectors over six months. Japan improves across all three sectors. Manufacturing deteriorates over six months in all reporting jurisdictions except Japan. Services are stronger in five of six jurisdictions with France the exception. The composite over six months worsens only in France and the EMU. However, viewed year-on-year, all sequential jurisdictions in all sectors weaken compared to their year ago 12-month averages, except in Japan where services and the composite improve on balance. There is a broad weakening comparing the last 12 months to the 12 months before that – a powerful generalizable result.

Other trend observations Manufacturing weakened over six months broadly as well as over three months, everywhere, strengthening in four of six monthly observations in October. Looking at a two-month comparison, the U.S., the U.K., and Germany show slightly stronger readings for manufacturing in October compared to August- the EMU, France, and Japan are weaker on balance. Service sectors show stronger reading for October than for August in the U.S., France, and Germany but only by quite small amounts. The composite reading is stronger in October compared to August only in the U.S. and Germany.

Weakness prevails for queue standing data However, the overpowering sense of the survey is that of weakness- momentum aside. There is not much push to the momentum that exists in the first place. But beyond that, the rankings for October levels of activity have extremely low percentile standings with the composite average standing at its 19th percentile, across respondents. Manufacturing averages a 9th percentile and services average a 26-percentile standing across respondents. Japan generally has the strongest rankings, but that is only a 47-percentile composite, a 19-percentile manufacturing sector standing, and a 57-percentile services sector standing. The U.S., however, as a slightly stronger manufacturing sector standing than Japan at its 23rd percentile, putting Japan in second place on that metric.

Diffusion readings mostly show weakness In raw diffusion terms, the strongest composite reading is 51 in the U.S. followed by 49.9 in Japan. The weakest composite diffusion is 45.3 in France. The strongest manufacturing diffusion gauge is at the edge of breakeven with a 50 reading in the U.S. followed by 48.5 in Japan. The weakest manufacturing reading is a 40.7 reading in Germany. Services have the highest standing in Japan at 51.1 with the U.S. at 50.9. The weakest service sector diffusion reading is 46.1 in France followed by 47.8 for the EMU.

In addition, diffusion readings mostly signal contraction The diffusion data remind us that most of these readings are signaling some degree of contraction not just weakness. Only the U.S. and Japan have sectors with diffusion readings of 50 or more and the U.S. has all sectors at or above 50 in October. Japan has only services above 50, but its composite is on the verge at 49.9.

One year-ago comparison Compared to one year-ago composites (month-to-month not average comparisons) are higher, significantly higher, in the U.S. and modestly higher in Germany and the U.K. The composite is substantially weaker over the past year in France, weaker in Japan and slightly weaker in the EMU. Manufacturing is weaker everywhere year-on-year except in the U.K. where the sector makes solid year-on-year improvement but still bears a very weak queue standing. Services are weaker in the EMU, France, and Japan and stronger in the U.S., the U.K. and Germany viewed year-on-year.

Canada’s nominal sales show some overall resilience; however, when adjusted for inflation, sales show deepening weakness in August.

Headline nominal trends are resilient- Canadian retail sales declined in August, falling by 0.1% after rising by 0.4% in July and gaining 0.1% in June. The progression of retail sales growth from 12-months to six-months to three-months shows gains across all horizons with no clear trend. The 12-month growth rate of 1.6% is the same as the annualized 3-month growth rate with a pickup to 3% over six-month horizon in between.

Industry trends show mixed nominal results- Looking at industry level sales, new car dealers show a steady slowdown in nominal sales from 7.2% over 12 months to 2.9% annualized over six months to less than 1% annualized pace over three months. Supermarket sales show a general slowdown with growth rates at 4% or more over six months and 12 months before contracting at a 2.3% annual rate over three months. Clothing store sales gained 5.7% over 12 months and then declined at a rate of 1% or less over six months and three months.

Nominal sales excluding motor vehicles- Taking motor vehicles out of total nominal retail sales leave sales tending towards slightly stronger growth with a gain of only 0.3% over 12 months, rising to 3% over six months and settling back to 2.2% at an annual rate over three months.

Real sales show a clear declining trend- The industry trends for nominal Canadian retail sales are not particularly clear; however, when we take the inflation out of the picture, the overall results clarify themselves. Over 12 months real retail sales rise 1.2%, over six months real retail sales fall at a 0.1% annual rate, and over three months real retail sales fall at a 3.4% annual rate. Moreover, real retail sales fall by 0.6% in August, fall by 0.1% in July, and fall by 0.1% in June. The recent monthly picture is unambiguously weak as monthly reports show that the real retail sales continue to contract.

The real thing... As always, during times when inflation is high and particularly when the inflation rates are changing, it's important to look at the inflation adjusted data instead of just the nominal data. But nominal data can sometimes provide a bit more detail sooner that adds to the flavor of the real signal. Canada's nominal data show unevenness on their own but not real clarity. The real retail sales data show substantial clarity.

Canadian sales quarter-to-date- On a quarter-to-date basis, Canadian retail sales rise by 1.8% in an annual rate with two months data in from the third quarter; excluding motor vehicles, that growth rate rises to 3.4% at an annual rate. However, including motor vehicles but then adjusting for inflation leaves quarter-to-date real retail sales for Canada falling at a 3.6% annual rate with two months of data in hand. In addition, nominal sector sales show that new car dealer sales fall 2% at an annual rate, the quarter-to-date supermarket sales fall by 0.2% at an annual rate, and clothing store sales fall at a 1.2% annual rate.

We shift our focus back on China in light of last week’s Q3 GDP print and monthly readings for September. That latest flurry of data releases has spurred further hope that the Chinese economy has entered a stabilization phase, following a protracted period of underwhelming growth. There is still reason for caution, however, given persistent weakness in the property sector, among other economic drags. Also, continued reliance on fiscal stimulus via local government infrastructure spending warrants continued monitoring, given how this spending is straining China’s debt arithmetic. Furthermore, there is the added financial stability concern arising from growing off-balance sheet local government debt, although we have already seen some regions beginning to address such problems. All told, while the stabilization in the economy is encouraging and may bring positive spillovers if sustained, property sector woes and signs of increasing indebtedness justify some unease.