Economy in Brief

The S&P Global flash PMI for August shows broad weakening with a couple of warmer spots as France and Japan showed stronger composite PMIs month-to-month. However, decaying on the month were the composite PMIs from the European Monetary Union, from Germany, from the United Kingdom, and from the United States. Only Japan showed strengthening across the board with improvement in manufacturing, services, and, of course, the composite. France showed resilience in the composite supported by manufacturing. Both Germany and the European Monetary Union showed month-to-month improvements in manufacturing, but they were not strong enough gains to translate to the composite index in the face of service sector weakness.

In August, only the U.K. and the U.S. show weakening in manufacturing, services, and the composite. The U.K. also shows triple weakening on those metrics in July as well. The U.S. does not follow that pattern because in July there was an improvement in manufacturing; however, in June the U.S. showed weakening in all three measures.

The overriding theme for the month, despite some mixed signals in month-to-month changes, is that the queue percentile standings are broadly and severely weak with the single exception of Japan where the services sector has a 92.5 percentile standing and the composite has an 88.7 percentile standing. Japan still has a subpar manufacturing sector with a 47.2 percentile standing. All the rest of the metrics in the table have queue percentile standings below the 50th percentile, meaning they're below their medians on data since January 2019, and for the most part, very substantially below their medians. For every reporting unit in the table, the standings for manufacturing are weaker than for services; the partial exception to that is France where the percentile standings for manufacturing and services are identical at a pathetically weak 9.4 percentile standing.

Compared to the responses in July, August does reflect some scattered improvements and August is also improved relative to the June period. In June there were only two sectors that were stronger; they were for manufacturing in the U.K. and in France.

Over three months there are net declines for all the countries and all the diffusion readings but the one exception being manufacturing in France which is up by 0.3 diffusion points over three months.

Assessing the PMI standings from January 2020 before COVID struck, all the sector readings for all the countries are weaker on balance except Japan. The composite in Japan is higher by 2.5 points, manufacturing is better by 0.9 points and services are better by 3.3 points over that period. But that is the exception. The U.S. composite is lower by 2.8 points, the European Monetary Union composite is lowered by 3.9 points, the U.K. composite is lower by 4.5 points, the French composite is lower by 5.0 points, and the German composite is lower by 6.4 points. After three and two-thirds years, most of the sectors were reporting weaker conditions than those that prevailed before COVID struck. It gives you some idea of the impact of COVID on the global economy. It created a short sharp recession in a lot of countries, but it has more broadly created a legacy of lethargy; the countries have had a very difficult time breaking out from it. The average percentile standing in manufacturing in August is a 9.7 percentile standing with services at a 29.9 percentile standing and the composite and a 22.6 percentile standing. Conditions are not only weaker than they were in January 2020, but compared to where they've been since 2019, they rank as extremely weak.

Belgian consumer confidence in the National Bank of Belgium consumer survey slipped to -7 in August from -6 in July. However, that is still slightly better than the June reading of -9. The queue standing of the consumer confidence metric on data back to 1991 places the indicator at a 48.3 percentile, marking it is just slightly below its median reading over that period. Tracking Belgian consumer confidence since January 2020 before Covid started, the indicator is one point lower than it was prior to the onset of the Covid episode.

The economic situation over the next 12 months for Belgium is assessed as weaker at -17 compared to -13 in July and -15 in June. The readings from 12 months ago and 6 months ago showed that there had been some improvement and that there was backtracking over 3 months, but the current reading is still slightly better than the reading from 3 months ago. However, the standing for the August reading is at its 25th percentile right at the border of the lowest quartile of its queue of data since 1991, not a very impressive result. The economic situation has a stronger diffusion index than the assessment over the last 12 months; however, the percentile standing for the next 12 months is weaker than it was for the last 12 months; the previous 12 months had a standing in its 30th percentile.

The trends for the next 12 months have a -1 diffusion reading which is a reading showing higher price pressure than in June or July. However, the longer progression for prices from 12-months to 6-months to 3-months shows expected pressure being relieved. And the standing for price trends in August is only at the 4th percentile, an extremely weak reading of expected inflation. This compares to the last 12 months where the reading had a massive 96-percentile standing.

Unemployment expectations according to the survey are going up. The response for June was +17 and July settled back at a + 15, but August sees a reading of +20. The progression from 12-months to 6-months to 3-months is flat but with a small uptick to +18 from +16 one year ago. The percentile standing for the unemployment gauge in August is at a 40.8 percentile; unemployment expectations are still below their median.

Household purchasing assessments slipped for both the next 12 months and in the current period. Apart from the month-to-month changes, the 12-month, to 6-month, to 3-month metrics show slight slippage in both of those categories. The environment for household purchases over the next 12 months, however, has a 66.6 percentile standing, at the border of the top third of its historic queue of data. The favorability of buying at present has only a 6.2 percentile standing, extremely weak.

The financial situation for households over the last 12 months were range-bound oscillations over 6 months and 3 months, but those reading in August now have a lower 5.9 percentile standing. Over the next 12 months, the August reading is near its median with a 49.3 percentile standing; August shows a net assessment at zero, the same as it was in July. Twelve-months ago this assessment was -8 with improvement in train, very weak. The outlook is for something much better. The standing for the household financial situation currently has improved sharply from this lower 5.9 percentile over the last 12 months, to a standing of 49.3% over the next 12 months. The current situation standing is at its 86th percentile.

The environment for household savings is positive over the next 12 months; the assessment has a 65.8 percentile standing. The favorability for savings at present has a 73.7 percentile standing. However, favorability of saving responses often reflect negativity on the outlook. If it's favorable to save, it's often not favorable to spend. And we see that less in the outlook for the next 12 months and more in the current assessment of conditions.

The German PPI is falling by 1.1% in July compared to June. The PPI now has a string of months in which prices are falling. This in fact looks even more persuasive because the PPI ex-energy fell by 0.4% in July, and it also has a string of months in which inflation is falling. But it’s only PPI inflation, not the sky. Central banks do not target producer prices. Table 1 also shows for comparison what's going on with the CPI; it has increased in two of the last three months. The CPI ex-energy has also increased in two of the last three months. As you look at these trends more broadly, producer prices are in fact coming to heel very sharply. And more than that, PPI prices are weak. However, consumer prices have hardly benefited from this trend at all.

The PPI excluding construction in Germany has fallen by 6% over 12 months; it falls at a 10.1% annual rate over 6 months and falls at a 10.4% annual rate over 3 months. That's impressive weakness. The PPI excluding energy rises 2.1% over 12 months, falls at a 1.1% annual rate over 6 months and falls at a 3.9% annual rate over 3 months indicating ongoing deceleration in the PPI ex-energy.

In comparison, the CPI, which is emphasized by the ECB (it targets the HICP), is up by 6.1% over 12 months; however, the pace slows to 3.5% over 6 months and slows further to 1.7% over 3 months. This declining progression brings the 3-month growth rate inside the target range for the ECB, but again central banks do not typically place a great deal of weight on these shorter-term compounded inflation rates. Looking at the CPI ex-energy we also see a 6.1% gain over 12 months, a 4% annual rate gain over 6 months, and a 2.5% annual rate gain over 3 months. Once again, we see clear inflation deceleration and progress but less deceleration than for the headline and even over 3 months there is less good news when the CPI ex=energy fails to drop inside of the ECB target range.

The chart (on the right) plots the PPI ex-energy against the CPI ex-energy. The chart is perhaps the best way to understand the stark difference and the difference in trend between these two metrics. The chart gives you a hint that historically the PPI is more volatile than the CPI and that it goes through exaggerated cycles in comparison with the CPI. In other words, just because the PPI accelerates sharply or decelerates sharply doesn't mean the CPI will run the same magnitudes; however, usually, the accelerations and decelerations of the PPI are reflected in some acceleration or deceleration in the CPI. It's just less pronounced. That seems to hold in this cycle as well.

Japan’s inflation in July continues at a pace in excess of the target sought by the Bank of Japan. However, inflation is not running wild; it's simply running hotter than the BOJ wants it to. Inflation had moved quite low in May with the headline of 0.1% and then picked up to 0.2% in June. The core rate, that had risen by 0.4% in May, slipped to a weaker rise of 0.1%. July shows the headline pace continues to accelerate with an increase of 0.4% and the core (all items excluding food & energy) logs the somewhat neutral 0.2% increase on the month.

July was an empty pinata for the hopeful On balance, the progression of inflation through July is disappointing. The monthly patterns are no longer encouraging and their progression of inflation from 12-months to 6-months to 3-months is neither disturbing nor encouraging and instead depicts an inflation rate that is wandering at a pace that's simply too high but without a clear trend. Headline inflation is up 3.2% over 12 months; that pace slips to 1.9% over 6 months but then moves back up to 2.7% over 3 months. The core pace that excludes food & energy shows the 2.6% increase over 12 months, rising to a 3.6% annual rate over 6 months, then settling back to a 2.8% annual rate over 3 months. While the core rate decelerates from 6-months to 3-months, the 3-months the rate is still above the 12-month pace which is not the signal that the Bank of Japan is looking for from the inflation rate.

Monthly inflation patterns If we rummage through the details of monthly inflation by industry, in July there are strong gains in reading and recreation as prices rose by 1.5%; also, for food and beverages as prices rose 0.8%; for clothing and personal items prices rose by 0.5%. In June there are not as many pressures present, but the largest month-to-month gain in these major categories is 0.3%. Categories with the max gain include food & beverages, clothing & personal items, and the miscellaneous category. Meanwhile, housing costs were flat in June as reading & recreational prices slipped by 0.2% month-to-month. In May when headline inflation was so low, four categories had increases of 0.4%; those were food & beverages, medical care, reading & recreation, as well as transportation & communication.

Longer inflation patterns Looking at these industry patterns, sequentially there's scant evidence of categories with inflation accelerating or decelerating for the most part inflation is just gyrating. Inflation changes look more chaotic or somewhat random. Over 3 months inflation decelerates for food & beverages, for educational costs, for medical care, for reading & recreation, and for transportation & communication. There are two decelerations in a row only for food & beverage prices that slip from an 8.7% gain over 12 months to an 8.6% gain annualized over 6 months, to a 6.2% annual rate over 3 months. That's the only category that shows clear directional progress; it's also the category with the hottest 3-month inflation growth rate.

Inflation steps into a new quarter With the July report, we're one month into a new quarter and looking at the rise in inflation in July relative to the previous quarterly average. The quarter-to-date headline inflation at 3.3% with core inflation running at a 2.4% annual rate, finds inflation is excessive for food & beverages at 7% in the quarter, clothing and personal items inflation is at 4.4%, reading & recreation prices are up at a 9.4% annual rate, while transportation & communication prices are up to a 3.6% annual rate. However, housing prices, education, medical care, and miscellaneous items are all running inflation rates in the one to 1 ½ percent range, quite subdued.