Economy in Brief: March 2022

The current IFO gauge in March fell sharply from a value of 15.5 in February to -6.3 in March. The manufacturing sector fell from a reading of 23.1 to -3.3. Construction fell from a reading of 8 to a reading of -12.2. Wholesaling fell from 14.3 to -6 6. Retailing fell from a February mark of -3.4 to -19.0 in March. The service sector reading of 13.6 in February diminished to 0.7 in March. It's the only positive net reading for climate in the IFO in March. As a whole, the business situation in the current environment erodes from 24.8 in February to 21.1 in March while expectations plummet from 6.3 in February to -21.7 in March. These are dramatic declines in the assessment of climate and expectations in the March IFO report.

Rankings We further evaluate the climate assessments by looking at the rankings of these sectors: the all-sector index has a ranking since 1991 in its 35th percentile, meaning it's been weaker only 35% of the time. Manufacturing is in its 27.7 percentile, wholesaling is in its 45th percentile, and retailing is in its 32nd percentile. Services, despite being the only positive net reading, is at the lowest standing of the bunch at a 9.5 percentile reading. Construction, despite its climate reading of -12.2, has a 60.1 percentile standing. That means based on all the construction metrics back to 1991 construction is lower 60% of the time and higher 40% of the time; it is the only sector above its historic median on this timeline.

Ranking of one-month changes The ranking of month-to month changes back to 1996 shows the largest one-month change and decline in manufacturing on record. Construction, wholesaling, and services have weakened by more month-to-month less than 1% of the time on that timeline. Retailing has weakened by more only 1.2% of the time. These are draconian changes month-to-month. It is stunning that markets have not reacted by more than they have with these kinds of erosions in the fundamentals.

Current conditions vs. expectations show stark difference There's a stark difference between the readings for current conditions and expectations this month. It noted above that the all-sector current index fell to 21.1 in March from 24.8 in February, while expectations in March plunged to -21.7 from 6.3. In February current conditions have not been that adversely affected at this point by the war in Ukraine, the sanctions, the recirculating virus, and other generalized economic circumstances in the German economy. However, expectations have been vastly downgraded. We see this by looking at standings of the two metrics: for current conditions, a 36.2% standing prevails which leaves the reading weak, in the lower one-third of its range; however, expectations have a 4.8-percentile standing. The components of expectations are even weaker than the 5% overall expectations standing. Each of the components of expectations in the IFO framework has a rank standing below the 4.8-percentile mark. The weakest being construction at 0.3%, the second weakest is wholesaling, followed by retailing at 2.3%, and then manufacturing at 2.4%. Looking at the individual standings for current conditions, services clearly is driving down the overall rank for the sector. Services has a 22.1 percentile standing. All the other industries: wholesaling, retailing, and manufacturing boast respective standings that are well above their 50th percentile mark (60th, 70th and 80th percentiles, in fact) indicating that they're above their medians for the period (reminder: median occurs at a ranking of 50%). Yet, the sector median stands in the 36th percentile dragged down exclusively by services weakness.

Position since before Covid struck is broadly weaker The far-right column chronicles change in the various line items compared to their levels in January 2020, before the virus struck. All the climate readings show declines compared to that date. Under current conditions, only manufacturing and wholesaling show increases. Among expectations all sectors are weaker and all of them are weaker in double digits.

Tight money isn't funny – but is it loose or tight? This month we encounter a bit of a dilemma in analyzing money supply growth. In the European Monetary Union (EMU), year-over-year M2 growth is at 6.8%. In the U.S. M2 money growth is at 11%, in the U.K. it's at 6.5%, and in Japan its pace is 3.6%. All of these are relatively robust rates of growth for nominal money supply. Money is plentiful. The question, however, is whether money has been too plentiful.

Inflation classically is described as too much money chasing too few goods. These statistics suggest that there has been plenty of money out there; however, in the wake of the pandemic, certainly in the U.S. where a lot of support monies were given to people who weren't working and weren't creating any output, there has come to be a maintenance of spending because there was a maintenance of income. However, there was a shortfall of supply and so with an abundance of money what we have is situation where there has been too much money chasing too few goods and probably more 'too-few goods' than 'too-much' money.

To a considerable extent, there seems to be a physical goods/services supply problem. The bigger problem seems to be that supply has been impeded and there haven't been enough goods and services around for people to purchase. Certainly, money supply statistics confirm in the sense that the 12-month growth rates are some of the lowest growth rates that we've seen from these countries, comparing the 12-month pace to the two-year average pace or the three-year average. Thus, the increase in money supply isn't particularly new nor is it robust and there is no acceleration.

Real money balances On the other hand, we can look at what's been going on with real monetary balances. This measure involves looking at nominal money supply growth with inflation subtracted from it. When we look at this measure, we find that over three-months and, for the most, part six-months real money balances are shrinking in the European Monetary Area and the U.K. In the U.S., three-month growth is negative but not six-month growth. For Japan, money-growth rates hover around 1% for real balances on this horizon.

Looking at the year-over-year rates, the European Monetary Union's money growth is 0.9%, in the U.S. it's 2.9%, in the U.K. it is 1.1%, and in Japan it is 2.6%. All these growth rates, of course, are substantially below their respective nominal counterparts because they're constructed by taking the nominal growth rate and subtracting inflation, at a time that inflation is accelerating. But what we see is that money supply growth has not been adequate to compensate for inflation and we're seeing that the growth in real monetary balances is barely enough to fuel any kind of decent real growth in many of these countries The U.S. is the marked exception since for the U.S. real balance growth is still at 2.9% over 12 months, which is still relatively robust. However, over shorter periods, real balance growth is impeding economic growth.

Credit in EMU Looking closer at the European Monetary Union, we see the credit to residents in nominal terms is up by just 4.1% over 12 months and by 4.4% for credit to the private sector. Look at these two measures, convert them to real terms, and the results change markedly. Credit to residents is falling 1.7% year-over-year and private credit is falling by 1.4% year-over-year. Clearly there is a pull-back in credit growth that is now becoming a drag on economic activity. While central banks haven't raised interest rates aggressively, they have controlled the growth rate of money supply and with that, the increase in inflation is creating a drag in terms of the provision of real money balances and real credit flows in the economy. That creates some braking effect on its own.

Oil trends The far-right hand column of the table also presents statistics on oil prices and there we see that oil prices are up by 56.1% over 12 months and this is for West Texas Intermediate (WTI) oil prices. Over 12 months, that same statistic, converted to real terms converted using the U.S. CPI, decelerates to a 44.6% gain. However, over three months and six months, the growth in real balances steps up from that 44% pace to growth rates in the 60% range.

There is no doubt in the age of Covid central banks were relatively easy with their money and credit growth, but fiscal policy was highly stimulative as well. Since inflation has picked up and there's concern about it. Central banks have paid a little bit more attention to money growth and some of them have started to raise interest rates and this is having some further impact on slowing the rate of money supply growth.