CPI inflation in Germany increased 0.3 percentage point this month to 1.9% (year/year % change) from 1.6% in February. A year ago this broad measure was 2.1%. In between, as is evident in the first graph, the German CPI held near a 2% [...]
Global| Mar 28 2007German CPI Picks Up, Pushed by Energy and Non-Energy Factors
- Global| Mar 28 2007
U.S. Durable Goods Weakness - NO RELIEF!
What results from this is still a series of weak sector growth rates. The economy is not faring as badly as orders suggest because shipments are growing better than orders. Defense shipments are positive although have softened their [...]
- Global| Mar 28 2007
U.S. Durable Goods Weakness - NO RELIEF!
What results from this is still a series of weak sector growth rates. The economy is not faring as badly as orders suggest because shipments are growing better than orders. Defense shipments are positive although have softened their [...]
- Global| Mar 27 2007
Despite the Ups and Downs Confidence Is Strong in Germany, the Czech Republic, Italy and Slovenia
A batch of confidence indicators, released today, shows that business confidence in Europe continues healthy. Confidence has improved in Germany and the Czech Republic, but faltered in Italy and Slovenia. In Germany, the March [...]
- Global| Mar 27 2007
U.S. Consumer Confidence Drops Sharply, But Not Seriously
Consumer confidence fell in the current month (March). The drop was fairly sharp to 107.2 from 111.2. But the current conditions index improved to 137.6 from 137.1 while the expectations index crashed and burned dropping to 86.9 from 93.8, hitting its lowest value since August of last year.
The chart on the left sketches out the path of consumer confidence and its two components over the past two business cycles. We add a horizontal line showing that current conditions has not yet hit the peak of the cycle that ended in 1990; they are, of course, way below the peak of the past cycle. Expectations have remained contained to a much lower profile than in either of the previous expansions.
But even a quick perusal of this graph reveals that expectations, important as they are, do not tell of the tipping point around recessions. Indeed we have relatively more FALSE signals from weak expectations than from current conditions – although sometimes from both. We see examples in expansion periods of expectations falling, sometimes quite sharply, but with the expansion continuing. The BEST signal of recession is that broad rounded top and fall off in CURRENT CONDITIONS. Presently that signal is not in play. So we continue to regard the ongoing upswing in consumer confidence as a good thing and brush off this month as mere volatility.
For the moment the signal on current conditions is brighter in the Conference Board report than in the U of M report (see graph on the right). What drives confidence/Sentiment?
We use the table below to help to answer that question and to draw comparisons between the U of M and Conference Board reports.The table presents correlation coefficients between the components on each survey (current conditions and expectations) and relates them to underlying economic variables of interest. You can readily see that the correlations for U of M on current conditions differ from the Conference Board on Current conditions and that current conditions differ from expectations and so on.
Reactions of Various Components to Selected IndicatorsExpectations Fed Funds 10-Year DJIA OIL CPI Unemployment Activity Jobs Conference Board 0.311 0.082 0.370 -0.120 -0.295 -0.535 0.089 0.286 University of Michigan 0.311 -0.035 0.434 -0.245 -0.404 -0.670 0.099 0.344 Current Conditions/Present Situation Fed Funds 10-Year DIJA OIL CPI Unemployment Activity Jobs Conference Board 0.533 -0.171 0.650 0.086 -0.181 -0.958 -0.016 0.370 University of Michigan 0.428 -0.108 0.472 0.012 -0.233 -0.779 0.146 0.146 Correlations on contemporaneous readings: activity is Real Retail Sales & IP over 3-mos
Conference Board Components for Consumer Confidence· What is more interesting is that we have ranked the importance of each factor across Confidence components and found that the ranking of the various effects – the ordering of the importance - is much the same for expectations in the Conference Board and the U of M frame works. With rank correlation of 0.93 (1.0 is perfect correlation) for expectations; the rank correlation for current conditions is 0.84, still relatively high.· The correlations in the table above refers to data since the end of the 1991 recession, encompassing nearly 200 observations.· Beyond the rough similarity in the U of M and Conference Board component rankings in their respective reactions to key economic factors we find:
For expectations:- A rise in the Fed funds rate is correlated with an improvement in expectations for both the U of M and Conference Board (CB).
- A rise in the 10Yr note rate has small impact in both cases and is negative for the U of M reading and positive for the CB reading.
- The DJIA has a powerful impact on each sub-index and is the second most important in each case. (of course, stocks were disturbed in the past month and have since had a significant, but not full, recovery).
- Oil prices are a negative correlation to both but of lower order importance.
- The CPI has a relatively large impact in both cases; it is negative as expected; higher inflation is bad for the outlook.
- The unemployment rate is the most important thing to each index and it is a negative correlation to expectations (lower unemployment means improved expectations).
- Current activity defined as the average of real IP and Real retail sales over the past three-months is a small positive – very small , not significant.
- Nonfarm jobs growth is also important to both but less important than the rate of unemployment. .
- Generally expectations depend most on the rate of unemployment, the DJIA, the CPI or job or Fed funds, depending on the index (U of M of CB).
normal">For current conditions the rankings are much the same, but for the Conference Board framework the two jobs measures become even more important and so does the DJIA. The current Fed funds becomes the third most important correlation in each current index and also remains positive as its correlation rises from its value in the expectations framework. For both indexes unemployment has the highest correlation, the DJIA is second and Fed funds is third, followed by jobs or the CPI.
· We also take the Conference Board responses and turn them into diffusion indexes as in the table below. Moreover, for each of these sub-readings there are survey responses as to whether businesses or labor market participants think current conditions or future conditions are �good� �bad� or �normal�. We place these readings in their respective range percentiles on observations back to October of 2003. What this does is summarized in the table below:Mar 07 Percentile standing Diffusion Overall Good Bad Normal Present Situation 94.8% Business Conditions 56.7 95.3% 88.9% 1.5% 36.1% Employment 55.7 100.0% 100.0% 0.0% 7.6% Expectations 65.1% Business Conditions 52.4 35.6% 2.9% 23.4% 91.3% Employment 48.1 44.4% 2.9% 23.4% 91.3% Income 54.7 40.0% 13.5% 25.7% 96.6% Buying plans -- Automobile 18.8% House 37.5% Major Appliance 69.6% Percentile of range since Oct 2003 to date. 100% is High; 0% is Low
Conference Board Consumer Confidence Trends by Region· Let’s walk you through the values in this table… We conclude that for the present situation business conditions are still expansionary (diffusion at 56.7 >50 (50 is neutral)). The present conditions business situation reading overall is in the 94th percentile of those since Oct 2003 (this refers to the level of the diffusion reading itself, meaning it has been stronger only 6% of the time); it is a relatively high reading. The percentage of respondents seeing conditions as ‘bad’ is in the 1.5 percentile - very low. The percentage of respondents that see things as normal is in the 36 percentile of their range. Current employment responses are the best of the cycle so far (100th percentile). With the most ‘good’ responses and the least ‘bad’ responses. The percentage saying things are normal was in the bottom 8 percent (7.6%) of historic readings. · Expectations are more equivocal. For business conditions, employment and income, ‘bad’ responses out rank ‘good’ responses substantially. BUT, despite that fact, bad responses are generally still in the lower 25% of their respective ranges and ‘Normal’ responses are in the 90-plus percentile. So things are substantially normal with deterioration around the edges. Overall diffusion for the expectations categories is still positive for business conditions and income, but contractionary for jobs (48.1<50) · Buying plans are weak by historic comparison except for appliances. normal">The Regional Picture:
Conference Board Consumer Confidence Trends by Region Regional Confidence from Oct-03 to Jan-07 % Above % Below Mar-07 Feb-07 Yr Ago Recsn-End Pre-Recsn Recsn End Pre Recsn New England 90.6 111.4 85.1 84.5 132.7 7.2% -31.7% Mid Atlantic 91.5 94.1 95.0 81.0 115.9 13.0% -21.1% East North Central 65.5 74.0 73.7 85.1 139.0 -23.0% -52.9% West North Central 105.8 113.7 107.8 95.5 135.5 10.8% -21.9% South Atlantic 117.1 132.7 131.5 89.6 141.6 30.7% -17.3% East South Central 122.2 104.5 106.7 74.9 132.1 63.2% -7.5% West South Central 130.0 130.0 125.4 97.7 137.4 33.1% -5.4% Mountain 142.7 141.2 141.1 98.3 140.4 45.2% 1.7% Pacific 121.5 121.6 112.8 82.4 134.0 47.5% -9.3% Pre-recession is 1998-2000 Percentage of Regions with confidence improving Confidence improving Mar-07 Feb-07 Jan-07 Dec-06 Nov-06 Oct-06 Yr/Yr MO/MO or as noted 33.3 44.4 44.4 33.3 33.3 55.6 44.4 Conference Board Consumer Confidence Trends by Region Regional Confidence from Oct-03 to Jan-07 % Above % Below Mar-07 Feb-07 Yr Ago Recsn-End Pre-Recsn Recsn End Pre Recsn New England 90.6 111.4 85.1 84.5 132.7 7.2% -31.7% Mid Atlantic 91.5 94.1 95.0 81.0 115.9 13.0% -21.1% East North Central 65.5 74.0 73.7 85.1 139.0 -23.0% -52.9% West North Central 105.8 113.7 107.8 95.5 135.5 10.8% -21.9% South Atlantic 117.1 132.7 131.5 89.6 141.6 30.7% -17.3% East South Central 122.2 104.5 106.7 74.9 132.1 63.2% -7.5% West South Central 130.0 130.0 125.4 97.7 137.4 33.1% -5.4% Mountain 142.7 141.2 141.1 98.3 140.4 45.2% 1.7% Pacific 121.5 121.6 112.8 82.4 134.0 47.5% -9.3% Pre-recession is 1998-2000 Percentage of Regions with confidence improving Confidence improving Mar-07 Feb-07 Jan-07 Dec-06 Nov-06 Oct-06 Yr/Yr MO/MO or as noted 33.3 44.4 44.4 33.3 33.3 55.6 44.4 Conference Board Consumer Confidence Trends by Region Regional Confidence from Oct-03 to Jan-07 % Above % Below Mar-07 Feb-07 Yr Ago Recsn-End Pre-Recsn Recsn End Pre Recsn New England 90.6 111.4 85.1 84.5 132.7 7.2% -31.7% Mid Atlantic 91.5 94.1 95.0 81.0 115.9 13.0% -21.1% East North Central 65.5 74.0 73.7 85.1 139.0 -23.0% -52.9% West North Central 105.8 113.7 107.8 95.5 135.5 10.8% -21.9% South Atlantic 117.1 132.7 131.5 89.6 141.6 30.7% -17.3% East South Central 122.2 104.5 106.7 74.9 132.1 63.2% -7.5% West South Central 130.0 130.0 125.4 97.7 137.4 33.1% -5.4% Mountain 142.7 141.2 141.1 98.3 140.4 45.2% 1.7% Pacific 121.5 121.6 112.8 82.4 134.0 47.5% -9.3% Pre-recession is 1998-2000 Percentage of Regions with confidence improving Confidence improving Mar-07 Feb-07 Jan-07 Dec-06 Nov-06 Oct-06 Yr/Yr MO/MO or as noted 33.3 44.4 44.4 33.3 33.3 55.6 44.4 · Regionally there is more evidence of slippage. This month the diffusion reading tells us that there was month-to-month improvement in only 33% of the regions. Year-over-year, only 44% of the regions have stronger confidence today than one year ago. We know that current conditions have done relatively better than expectations. Overall, the present situation is better year-over-year by 2.5% while expectations are lower by 3.8%. · The Consumer Confidence report shows us some irregularities in the economy. Certainly expectations are having a hard time coming to grips with the stock market turbulence, stubborn inflation and higher oil/gas prices. But for the present situation the more powerful draw of low unemployment, ongoing job gains and past stock market gains have underpinned a solid reading. It seems clear that the economy is still fighting off some stress, but also that conditions may be better than what the expectations index is telling us. At this point in the cycle current conditions readings matter more. · When both expectations and current conditions slip together and current conditions form that round shouldered drop – we will worry. Regional Confidence from Oct-03 to Jan-07 % Above % Below Mar-07 Feb-07 Yr Ago Recsn-End Pre-Recsn Recsn End Pre Recsn New England 90.6 111.4 85.1 84.5 132.7 7.2% -31.7% Mid Atlantic 91.5 94.1 95.0 81.0 115.9 13.0% -21.1% East North Central 65.5 74.0 73.7 85.1 139.0 -23.0% -52.9% West North Central 105.8 113.7 107.8 95.5 135.5 10.8% -21.9% South Atlantic 117.1 132.7 131.5 89.6 141.6 30.7% -17.3% East South Central 122.2 104.5 106.7 74.9 132.1 63.2% -7.5% West South Central 130.0 130.0 125.4 97.7 137.4 33.1% -5.4% Mountain 142.7 141.2 141.1 98.3 140.4 45.2% 1.7% Pacific 121.5 121.6 112.8 82.4 134.0 47.5% -9.3% Pre-recession is 1998-2000 Percentage of Regions with confidence improving Confidence improving Mar-07 Feb-07 Jan-07 Dec-06 Nov-06 Oct-06 Yr/Yr MO/MO or as noted 33.3 44.4 44.4 33.3 33.3 55.6 44.4 - Global| Mar 27 2007
U.S. Consumer Confidence Drops Sharply, But Not Seriously
Consumer confidence fell in the current month (March). The drop was fairly sharp to 107.2 from 111.2. But the current conditions index improved to 137.6 from 137.1 while the expectations index crashed and burned dropping to 86.9 from 93.8, hitting its lowest value since August of last year.
The chart on the left sketches out the path of consumer confidence and its two components over the past two business cycles. We add a horizontal line showing that current conditions has not yet hit the peak of the cycle that ended in 1990; they are, of course, way below the peak of the past cycle. Expectations have remained contained to a much lower profile than in either of the previous expansions.
But even a quick perusal of this graph reveals that expectations, important as they are, do not tell of the tipping point around recessions. Indeed we have relatively more FALSE signals from weak expectations than from current conditions – although sometimes from both. We see examples in expansion periods of expectations falling, sometimes quite sharply, but with the expansion continuing. The BEST signal of recession is that broad rounded top and fall off in CURRENT CONDITIONS. Presently that signal is not in play. So we continue to regard the ongoing upswing in consumer confidence as a good thing and brush off this month as mere volatility.
For the moment the signal on current conditions is brighter in the Conference Board report than in the U of M report (see graph on the right). What drives confidence/Sentiment?
We use the table below to help to answer that question and to draw comparisons between the U of M and Conference Board reports.The table presents correlation coefficients between the components on each survey (current conditions and expectations) and relates them to underlying economic variables of interest. You can readily see that the correlations for U of M on current conditions differ from the Conference Board on Current conditions and that current conditions differ from expectations and so on.
Reactions of Various Components to Selected IndicatorsExpectations Fed Funds 10-Year DJIA OIL CPI Unemployment Activity Jobs Conference Board 0.311 0.082 0.370 -0.120 -0.295 -0.535 0.089 0.286 University of Michigan 0.311 -0.035 0.434 -0.245 -0.404 -0.670 0.099 0.344 Current Conditions/Present Situation Fed Funds 10-Year DIJA OIL CPI Unemployment Activity Jobs Conference Board 0.533 -0.171 0.650 0.086 -0.181 -0.958 -0.016 0.370 University of Michigan 0.428 -0.108 0.472 0.012 -0.233 -0.779 0.146 0.146 Correlations on contemporaneous readings: activity is Real Retail Sales & IP over 3-mos
Conference Board Components for Consumer Confidence· What is more interesting is that we have ranked the importance of each factor across Confidence components and found that the ranking of the various effects – the ordering of the importance - is much the same for expectations in the Conference Board and the U of M frame works. With rank correlation of 0.93 (1.0 is perfect correlation) for expectations; the rank correlation for current conditions is 0.84, still relatively high.· The correlations in the table above refers to data since the end of the 1991 recession, encompassing nearly 200 observations.· Beyond the rough similarity in the U of M and Conference Board component rankings in their respective reactions to key economic factors we find:
For expectations:- A rise in the Fed funds rate is correlated with an improvement in expectations for both the U of M and Conference Board (CB).
- A rise in the 10Yr note rate has small impact in both cases and is negative for the U of M reading and positive for the CB reading.
- The DJIA has a powerful impact on each sub-index and is the second most important in each case. (of course, stocks were disturbed in the past month and have since had a significant, but not full, recovery).
- Oil prices are a negative correlation to both but of lower order importance.
- The CPI has a relatively large impact in both cases; it is negative as expected; higher inflation is bad for the outlook.
- The unemployment rate is the most important thing to each index and it is a negative correlation to expectations (lower unemployment means improved expectations).
- Current activity defined as the average of real IP and Real retail sales over the past three-months is a small positive – very small , not significant.
- Nonfarm jobs growth is also important to both but less important than the rate of unemployment. .
- Generally expectations depend most on the rate of unemployment, the DJIA, the CPI or job or Fed funds, depending on the index (U of M of CB).
normal">For current conditions the rankings are much the same, but for the Conference Board framework the two jobs measures become even more important and so does the DJIA. The current Fed funds becomes the third most important correlation in each current index and also remains positive as its correlation rises from its value in the expectations framework. For both indexes unemployment has the highest correlation, the DJIA is second and Fed funds is third, followed by jobs or the CPI.
· We also take the Conference Board responses and turn them into diffusion indexes as in the table below. Moreover, for each of these sub-readings there are survey responses as to whether businesses or labor market participants think current conditions or future conditions are �good� �bad� or �normal�. We place these readings in their respective range percentiles on observations back to October of 2003. What this does is summarized in the table below:Mar 07 Percentile standing Diffusion Overall Good Bad Normal Present Situation 94.8% Business Conditions 56.7 95.3% 88.9% 1.5% 36.1% Employment 55.7 100.0% 100.0% 0.0% 7.6% Expectations 65.1% Business Conditions 52.4 35.6% 2.9% 23.4% 91.3% Employment 48.1 44.4% 2.9% 23.4% 91.3% Income 54.7 40.0% 13.5% 25.7% 96.6% Buying plans -- Automobile 18.8% House 37.5% Major Appliance 69.6% Percentile of range since Oct 2003 to date. 100% is High; 0% is Low
Conference Board Consumer Confidence Trends by Region· Let’s walk you through the values in this table… We conclude that for the present situation business conditions are still expansionary (diffusion at 56.7 >50 (50 is neutral)). The present conditions business situation reading overall is in the 94th percentile of those since Oct 2003 (this refers to the level of the diffusion reading itself, meaning it has been stronger only 6% of the time); it is a relatively high reading. The percentage of respondents seeing conditions as ‘bad’ is in the 1.5 percentile - very low. The percentage of respondents that see things as normal is in the 36 percentile of their range. Current employment responses are the best of the cycle so far (100th percentile). With the most ‘good’ responses and the least ‘bad’ responses. The percentage saying things are normal was in the bottom 8 percent (7.6%) of historic readings. · Expectations are more equivocal. For business conditions, employment and income, ‘bad’ responses out rank ‘good’ responses substantially. BUT, despite that fact, bad responses are generally still in the lower 25% of their respective ranges and ‘Normal’ responses are in the 90-plus percentile. So things are substantially normal with deterioration around the edges. Overall diffusion for the expectations categories is still positive for business conditions and income, but contractionary for jobs (48.1<50) · Buying plans are weak by historic comparison except for appliances. normal">The Regional Picture:
Conference Board Consumer Confidence Trends by Region Regional Confidence from Oct-03 to Jan-07 % Above % Below Mar-07 Feb-07 Yr Ago Recsn-End Pre-Recsn Recsn End Pre Recsn New England 90.6 111.4 85.1 84.5 132.7 7.2% -31.7% Mid Atlantic 91.5 94.1 95.0 81.0 115.9 13.0% -21.1% East North Central 65.5 74.0 73.7 85.1 139.0 -23.0% -52.9% West North Central 105.8 113.7 107.8 95.5 135.5 10.8% -21.9% South Atlantic 117.1 132.7 131.5 89.6 141.6 30.7% -17.3% East South Central 122.2 104.5 106.7 74.9 132.1 63.2% -7.5% West South Central 130.0 130.0 125.4 97.7 137.4 33.1% -5.4% Mountain 142.7 141.2 141.1 98.3 140.4 45.2% 1.7% Pacific 121.5 121.6 112.8 82.4 134.0 47.5% -9.3% Pre-recession is 1998-2000 Percentage of Regions with confidence improving Confidence improving Mar-07 Feb-07 Jan-07 Dec-06 Nov-06 Oct-06 Yr/Yr MO/MO or as noted 33.3 44.4 44.4 33.3 33.3 55.6 44.4 Conference Board Consumer Confidence Trends by Region Regional Confidence from Oct-03 to Jan-07 % Above % Below Mar-07 Feb-07 Yr Ago Recsn-End Pre-Recsn Recsn End Pre Recsn New England 90.6 111.4 85.1 84.5 132.7 7.2% -31.7% Mid Atlantic 91.5 94.1 95.0 81.0 115.9 13.0% -21.1% East North Central 65.5 74.0 73.7 85.1 139.0 -23.0% -52.9% West North Central 105.8 113.7 107.8 95.5 135.5 10.8% -21.9% South Atlantic 117.1 132.7 131.5 89.6 141.6 30.7% -17.3% East South Central 122.2 104.5 106.7 74.9 132.1 63.2% -7.5% West South Central 130.0 130.0 125.4 97.7 137.4 33.1% -5.4% Mountain 142.7 141.2 141.1 98.3 140.4 45.2% 1.7% Pacific 121.5 121.6 112.8 82.4 134.0 47.5% -9.3% Pre-recession is 1998-2000 Percentage of Regions with confidence improving Confidence improving Mar-07 Feb-07 Jan-07 Dec-06 Nov-06 Oct-06 Yr/Yr MO/MO or as noted 33.3 44.4 44.4 33.3 33.3 55.6 44.4 Conference Board Consumer Confidence Trends by Region Regional Confidence from Oct-03 to Jan-07 % Above % Below Mar-07 Feb-07 Yr Ago Recsn-End Pre-Recsn Recsn End Pre Recsn New England 90.6 111.4 85.1 84.5 132.7 7.2% -31.7% Mid Atlantic 91.5 94.1 95.0 81.0 115.9 13.0% -21.1% East North Central 65.5 74.0 73.7 85.1 139.0 -23.0% -52.9% West North Central 105.8 113.7 107.8 95.5 135.5 10.8% -21.9% South Atlantic 117.1 132.7 131.5 89.6 141.6 30.7% -17.3% East South Central 122.2 104.5 106.7 74.9 132.1 63.2% -7.5% West South Central 130.0 130.0 125.4 97.7 137.4 33.1% -5.4% Mountain 142.7 141.2 141.1 98.3 140.4 45.2% 1.7% Pacific 121.5 121.6 112.8 82.4 134.0 47.5% -9.3% Pre-recession is 1998-2000 Percentage of Regions with confidence improving Confidence improving Mar-07 Feb-07 Jan-07 Dec-06 Nov-06 Oct-06 Yr/Yr MO/MO or as noted 33.3 44.4 44.4 33.3 33.3 55.6 44.4 · Regionally there is more evidence of slippage. This month the diffusion reading tells us that there was month-to-month improvement in only 33% of the regions. Year-over-year, only 44% of the regions have stronger confidence today than one year ago. We know that current conditions have done relatively better than expectations. Overall, the present situation is better year-over-year by 2.5% while expectations are lower by 3.8%. · The Consumer Confidence report shows us some irregularities in the economy. Certainly expectations are having a hard time coming to grips with the stock market turbulence, stubborn inflation and higher oil/gas prices. But for the present situation the more powerful draw of low unemployment, ongoing job gains and past stock market gains have underpinned a solid reading. It seems clear that the economy is still fighting off some stress, but also that conditions may be better than what the expectations index is telling us. At this point in the cycle current conditions readings matter more. · When both expectations and current conditions slip together and current conditions form that round shouldered drop – we will worry.
Despite the Ups and Downs Confidence Is Strong in Germany, the Czech Republic, Italy and SloveniaRegional Confidence from Oct-03 to Jan-07 % Above % Below Mar-07 Feb-07 Yr Ago Recsn-End Pre-Recsn Recsn End Pre Recsn New England 90.6 111.4 85.1 84.5 132.7 7.2% -31.7% Mid Atlantic 91.5 94.1 95.0 81.0 115.9 13.0% -21.1% East North Central 65.5 74.0 73.7 85.1 139.0 -23.0% -52.9% West North Central 105.8 113.7 107.8 95.5 135.5 10.8% -21.9% South Atlantic 117.1 132.7 131.5 89.6 141.6 30.7% -17.3% East South Central 122.2 104.5 106.7 74.9 132.1 63.2% -7.5% West South Central 130.0 130.0 125.4 97.7 137.4 33.1% -5.4% Mountain 142.7 141.2 141.1 98.3 140.4 45.2% 1.7% Pacific 121.5 121.6 112.8 82.4 134.0 47.5% -9.3% Pre-recession is 1998-2000 Percentage of Regions with confidence improving Confidence improving Mar-07 Feb-07 Jan-07 Dec-06 Nov-06 Oct-06 Yr/Yr MO/MO or as noted 33.3 44.4 44.4 33.3 33.3 55.6 44.4
by Louise Curley March 27, 2007
A batch of confidence indicators, released today, shows that business confidence in Europe continues healthy. Confidence has improved in Germany and the Czech Republic, but faltered in Italy and Slovenia. In Germany, the March increase in confidence shown in the broad IFO index confirmed the rise noted earlier in the ZEW index. The IFO index rose 0.65% to 107.7 (2000=100) in March from 107.0 in February. Apparently German business leaders have shrugged off fears that the increase in the Value Added Tax of 3% on January 1, 2007 would have a major impact on demand.
In contrast to Germany, the ISAE (Institute for Studies and Economic Analysis) measure of confidence in Italy fell 0.63% in March to 94.9 (2000=100) from 95.5 in February. While confidence in Germany has tended to improve over the last nine months or so, confidence in Italy has deteriorated as can be seen in the first chart.
The measures used to describe confidence in the Czech Republic and Slovenia are Percent Balances. A positive (negative) balance indicates that those expecting improvement (deterioration) in the economy exceed those expecting deterioration (improvement). Besides reporting confidence as an index, Germany also reports the IFO confidence indicator as a Percent Balance. Comparisons of the Percent Balances of Germany, the Czech Republic and Slovenia are shown in the second chart. The percent balance rose in March, in Germany and the Czech Republic and fell in Slovenia.
In spite of the fact that confidence indicators in Italy and Slovenia have recently declined, confidence in these countries remains strong. As we noted in yesterday's commentary, the Eurostat Synthetic Confidence Indexes, which are so constructed that their long term average is equal to 100 with a standard deviation of 10, allow one to compare the absolute levels of confidence relative to their long term averages in the countries of the European Community. The Synthetic Confidence Indicators for the Czech Republic and Slovenia in February of this year were both equal to 121.2, indicating that confidence was 21.2% above its long term average or more than 2 standard deviations. Italy at 110.3 was 10.3% above its long term average or just over 1 standard deviation and Germany at 108.5 was 8.5% above its long term average or somewhat less than one standard deviation.The Synthetic Indexes of Confidence for Germany, Italy, Slovenia, and the Czech Republic are shown in the third chart.
MEASURES OF BUSINESS CONFIDENCE Mar 06 Feb 06 Mar 05 M/M % Y/Y % 2006 2005 2004 Germany IFO Index (2000=100) 107.7 107.0 105.5 0.65 2.09 105.5 95.5 95.4 Italy ISAE Index (2000=100) 94.9 95.5 94.5 -0.63 0.42 95.8 87.5 89.3 Germany IFO (Percent Balance) 14.5 13.1 10.1 1.4 4.4 10.1 -9.7 -9.9 Czech Republic (Percent Balance) 14 12 7 2 7 10 7 9 Slovenia (Percent Balance) 12 14 7 -2 5 9 0 1 - Global| Mar 26 2007
Consumer Confidence Drops Sharply, But Not Seriously
Consumer confidence fell in the current month (March). The drop was fairly sharp to 107.2 from 111.2. But the current conditions index improved to 137.6 from 137.1 while the expectations index crashed and burned dropping to 86.9 from 93.8, hitting its lowest value since August of last year.
The chart on the left sketches out the path of consumer confidence and its two components over the past two business cycles. We add a horizontal line showing that current conditions has not yet hit the peak of the cycle that ended in 1990; they are, of course, way below the peak of the past cycle. Expectations have remained contained to a much lower profile than in either of the previous expansions.
But even a quick perusal of this graph reveals that expectations, important as they are, do not tell of the tipping point around recessions. Indeed we have relatively more FALSE signals from weak expectations than from current conditions – although sometimes from both. We see examples in expansion periods of expectations falling, sometimes quite sharply, but with the expansion continuing. The BEST signal of recession is that broad rounded top and fall off in CURRENT CONDITIONS. Presently that signal is not in play. So we continue to regard the ongoing upswing in consumer confidence as a good thing and brush off this month as mere volatility.
For the moment the signal on current conditions is brighter in the Conference Board report than in the U of M report (see graph on the right).What drives confidence/Sentiment?
We use the table below to help to answer that question and to draw comparisons between the U of M and Conference Board reports.The table presents correlation coefficients between the components on each survey (current conditions and expectations) and relates them to underlying economic variables of interest. You can readily see that the correlations for U of M on current conditions differ from the Conference Board on Current conditions and that current conditions differ from expectations and so on.
Reactions of Various Components to Selected IndicatorsExpectations Fed Funds 10-Year DJIA OIL CPI Unemployment Activity Jobs Conference Board 0.311 0.082 0.370 -0.120 -0.295 -0.535 0.089 0.286 University of Michigan 0.311 -0.035 0.434 -0.245 -0.404 -0.670 0.099 0.344 Current Conditions/Present Situation Fed Funds 10-Year DIJA OIL CPI Unemployment Activity Jobs Conference Board 0.533 -0.171 0.650 0.086 -0.181 -0.958 -0.016 0.370 University of Michigan 0.428 -0.108 0.472 0.012 -0.233 -0.779 0.146 0.146 Correlations on contemporaneous readings: activity is Real Retail Sales & IP over 3-mos
Selected housing ratios· What is more interesting is that we have ranked the importance of each factor across Confidence components and found that the ranking of the various effects – the ordering of the importance - is much the same for expectations in the Conference Board and the U of M frame works. With rank correlation of 0.93 (1.0 is perfect correlation) for expectations; the rank correlation for current conditions is 0.84, still relatively high.· The correlations in the table above refers to data since the end of the 1991 recession, encompassing nearly 200 observations.· Beyond the rough similarity in the U of M and Conference Board component rankings in their respective reactions to key economic factors we find:
For expectations:- A rise in the Fed funds rate is correlated with an improvement in expectations for both the U of M and Conference Board (CB).
- A rise in the 10Yr note rate has small impact in both cases and is negative for the U of M reading and positive for the CB reading.
- The DJIA has a powerful impact on each sub-index and is the second most important in each case. (of course, stocks were disturbed in the past month and have since had a significant, but not full, recovery).
- Oil prices are a negative correlation to both but of lower order importance.
- The CPI has a relatively large impact in both cases; it is negative as expected; higher inflation is bad for the outlook.
- The unemployment rate is the most important thing to each index and it is a negative correlation to expectations (lower unemployment means improved expectations).
- Current activity defined as the average of real IP and Real retail sales over the past three-months is a small positive – very small , not significant.
- Nonfarm jobs growth is also important to both but less important than the rate of unemployment. .
- Generally expectations depend most on the rate of unemployment, the DJIA, the CPI or job or Fed funds, depending on the index (U of M of CB).
normal">For current conditions the rankings are much the same, but for the Conference Board framework the two jobs measures become even more important and so does the DJIA. The current Fed funds becomes the third most important correlation in each current index and also remains positive as its correlation rises from its value in the expectations framework. For both indexes unemployment has the highest correlation, the DJIA is second and Fed funds is third, followed by jobs or the CPI.
· We also take the Conference Board responses and turn them into diffusion indexes as in the table below. Moreover, for each of these sub-readings there are survey responses as to whether businesses or labor market participants think current conditions or future conditions are �good� �bad� or �normal�. We place these readings in their respective range percentiles on observations back to October of 2003. What this does is summarized in the table below:Permits/Starts Starts/New Houses New Houses/Existing Houses New Houses (-2)/Existing Houses Max 1.167 2.054 0.201 0.198 Min 0.921 1.402 0.127 0.153 Avg 1.030 1.703 0.172 0.172 Percentile 34.1% 60.8% 0.0% 7.0%
Selected housing ratios· Let’s walk you through the values in this table… We conclude that for the present situation business conditions are still expansionary (diffusion at 56.7 >50 (50 is neutral)). The present conditions business situation reading overall is in the 94th percentile of those since Oct 2003 (this refers to the level of the diffusion reading itself, meaning it has been stronger only 6% of the time); it is a relatively high reading. The percentage of respondents seeing conditions as ‘bad’ is in the 1.5 percentile - very low. The percentage of respondents that see things as normal is in the 36 percentile of their range. Current employment responses are the best of the cycle so far (100th percentile). With the most ‘good’ responses and the least ‘bad’ responses. The percentage saying things are normal was in the bottom 8 percent (7.6%) of historic readings. · Expectations are more equivocal. For business conditions, employment and income, ‘bad’ responses out rank ‘good’ responses substantially. BUT, despite that fact, bad responses are generally still in the lower 25% of their respective ranges and ‘Normal’ responses are in the 90-plus percentile. So things are substantially normal with deterioration around the edges. Overall diffusion for the expectations categories is still positive for business conditions and income, but contractionary for jobs (48.1<50) · Buying plans are weak by historic comparison except for appliances. normal">The Regional Picture:
Selected housing ratios Permits/Starts Starts/New Houses New Houses/Existing Houses New Houses (-2)/Existing Houses Max 1.167 2.054 0.201 0.198 Min 0.921 1.402 0.127 0.153 Avg 1.030 1.703 0.172 0.172 Percentile 34.1% 60.8% 0.0% 7.0% Selected housing ratios Permits/Starts Starts/New Houses New Houses/Existing Houses New Houses (-2)/Existing Houses Max 1.167 2.054 0.201 0.198 Min 0.921 1.402 0.127 0.153 Avg 1.030 1.703 0.172 0.172 Percentile 34.1% 60.8% 0.0% 7.0% Selected housing ratios Permits/Starts Starts/New Houses New Houses/Existing Houses New Houses (-2)/Existing Houses Max 1.167 2.054 0.201 0.198 Min 0.921 1.402 0.127 0.153 Avg 1.030 1.703 0.172 0.172 Percentile 34.1% 60.8% 0.0% 7.0% · Regionally there is more evidence of slippage. This month the diffusion reading tells us that there was month-to-month improvement in only 33% of the regions. Year-over-year, only 44% of the regions have stronger confidence today than one year ago. We know that current conditions have done relatively better than expectations. Overall, the present situation is better year-over-year by 2.5% while expectations are lower by 3.8%. · The Consumer Confidence report shows us some irregularities in the economy. Certainly expectations are having a hard time coming to grips with the stock market turbulence, stubborn inflation and higher oil/gas prices. But for the present situation the more powerful draw of low unemployment, ongoing job gains and past stock market gains have underpinned a solid reading. It seems clear that the economy is still fighting off some stress, but also that conditions may be better than what the expectations index is telling us. At this point in the cycle current conditions readings matter more. · When both expectations and current conditions slip together and current conditions form that round shouldered drop – we will worry. Permits/Starts Starts/New Houses New Houses/Existing Houses New Houses (-2)/Existing Houses Max 1.167 2.054 0.201 0.198 Min 0.921 1.402 0.127 0.153 Avg 1.030 1.703 0.172 0.172 Percentile 34.1% 60.8% 0.0% 7.0% Business leaders in France became slightly more optimistic in March. The composite business climate indicator, computed by INSEE (Institut Nationale des Statistisque et Etudes Economique) rose 0.93% to 109 from 108 in February and was [...]
- of8Go to 2 page