Economy in Brief: November 2022

The Belgian CPI has strong correlations with both German and EMU-wide inflation measures; the deceleration of headline inflation for the Belgian CPI in November is good news. The year-over-year pace in October had been 12%; in November the year-over-year pace migrates down to 10.6% over 12 months. The CPI core rate also is slightly easier rolling in at a 6.1% annual gain in October and ticking lowered to a 6.0% pace in November. Of course, we're looking at month-to-month comparisons of year-over-year gains and, in the case of the core, looking at a very tiny deceleration. However, markets are grasping at straws for good news and there are at least several hints of good news in this report.

Beyond those headlines, we see that inflation on a year-over-year basis still has diffusion of 100% in November as it did in October. Both months show acceleration in the underlying pace of inflation and all the CPI categories compared to the one-year ago pace. Headline inflation may be accelerating, but disaggregated, across all categories it's showing a diminishing tendency to do that.

Sequential inflation provides the less pleasant message here. The CPI headline at 10.6% over 12 months races at a stronger 11.7% pace over six months and rises to a 13.3% pace over three months. The CPI core provides less clear guidance as it rises at 6% pace over 12 months then at a 6.8% pace over six months and then falls back to a 6% pace over three months leaving us with an unclear message about 'trend.'

Inflation diffusion, which compares the breadth of inflation in each period to the period before, is at 100% over 12 months. Inflation accelerates in all categories over 12 months; that proportion falls to 70% over six months comparing the six-month pace to the 12-month pace. Over three months inflation diffusion falls to a still strong 60%; that compares inflation over three months to six months. Diffusion data show that the breadth of inflation acceleration is narrowing from 12-months to six-months to three-months rather steadily. This is the opposite message from the headline and is a message that may be more consistent with the core pace that doesn't have a clear message on the path of inflation itself.

GfK provides a lookahead confidence measure for Germany. For December, the confidence measure logs a -40.2 reading; this is a slight improvement from -41.9 in November and -42.8 in October, but it's still considerably weaker than September's -36.8 and August value of -30.9. German confidence clearly has moved to an even lower level over the last three months, and it continues to hover in this lower position.

The components of the climate index lag the headline by one month. They offer data for November: economic expectations improved in November to -17.9 from -22.2. Income expectations improved to -54.3 from -60.5 while the propensity to buy worsened slightly to -18.6 from -17.5.

The count or rank standings for these metrics give us a better idea of where confidence sits in absolute terms. The climate index has been weaker 0.8% of the time (only in the previous two months!). Economic expectations have been lower 11.6% of the time. Income expectations have been lower 0.8% of the time. The propensity to buy has been weaker 17.3% of the time. The propensity to buy metric is significantly less weak than the other components; however, it is still quite dramatically weak because the 17 percentile standing means that it's weaker than this less than one-fifth of the time.

The table also presents percentile standing data on where the components sit in their high-low range. Climate is at its 4.8 percentile mark. In other words, quite apart from how frequently the reading is lower, a separate question regards how low is it compared to its all-time low? Its lowest reading is only 4.8 percentage points below its current reading. The economic index has its all-time low only 14.6% lower than its current reading. Income expectations are only 10.4% lower. The propensity to buy lowest reading is 30.7% lower. Buying conditions are not as dramatically weak.

So not only are the current readings weak and rarely weaker but most of them are quite close to their historic all-time lows, marking this as not just a difficult point but as an extremely distressed situation that has a great deal of absolute weakness.

For comparison, I have the most up-to-date confidence data from Italy, France, and the United Kingdom as well. Those metrics lag by one month and are comparable in timing to the components for the German index as of November. Italian confidence improved sharply to 98.1 in November from 90.1 in October; French confidence improved to 83.4 from 82.1; and the U.K. confidence improved to -44.0 from -47.0.

The S&P flash PMIs for November show mixed results for the five early reporting composites that include the European Monetary Union, EMU members Germany and France, the U.K., and the U.S. Three of those five show stronger PMI composites while two show weaker composites. Stronger composites are reported by the European Monetary Union as well as Germany and the U.K. Weaker composites are reported by France and the U.S.

In the European Monetary Union, the strength in the composite occurs because of a stronger manufacturing reading. In Germany, the stronger composite also is the result of a stronger manufacturing reading. In the U.K., the strength is technical since the two components are unchanged on the month- the improvement results from rounding.

France shows a weaker composite reading despite a stronger manufacturing reading because services are weak, and the service sector reading dominates the manufacturing improvement. In the U.S., the composite is weaker on the back of manufacturing and services both weakening month-to-month.

These results follow October where all the sectors were weaker month-to-month except for services in Germany. In September, there was broad weakening: the U.S. was an exception with strengthening on the composite, manufacturing, and services. The U.K. had a stronger manufacturing sector in September. France had a stronger composite and services reading in September, while all the rest of the components and composites were weaker month to month.

The sequential averages are calculated on finalized data so they exclude data from November; they show weaker readings for 3-months compared to 6-months, and weaker readings for 6-months compared to 12-months for all the composites and all their components. Over 12 months, there was a broad weakening as well with only one composite improving, that's for France, while the services sector is improved for the European Monetary Union, France, and the United Kingdom.

Weakness continues... This continues to be a period of substantial weakness even though there's slightly more strength in November than what we've been seeing in recent months and on trend. There's very little significant increase; there are some technical rebounds on the month but nothing that looks truly impressive.

All the queue (or rank) standings for all the composites and for all components have standings well below their 50% mark which marks their historic medians for this period. The strongest reading in the table is the 27.6% standing for manufacturing in Germany, the second strongest is a 20.7 percentile standing for services in France, followed by 19 percentile standings for the European Monetary Union for its manufacturing and services sectors. Except for the German reading, these are all readings in the bottom one-fifth of their historic queues of values over this span, a period that goes back to February 2018.

The rankings by sector are consistently low with manufacturing for this group averaging a 14 percentile standing while services average a 15 percentile standing, and that combination is so weak that the composite averages a weaker 11.7 percentile standing.

The column labeled 'percentile' places this month's observations in a percentage position between its highest and lowest readings; these assessments are consistently higher than the queue standings (and less demanding). They are derived by looking at only three readings: the current reading, the highest reading on the period, and the lowest reading on the period. Of the 15 readings in the table, six of them have percentage standings in their historic ranges of value that are below their mid-range values (below 50%). The U.S. shows readings below their mid-range for the composite and both components. Apart from the U.S., composite readings have a standing the range from the 64.6 percentile in Germany to the 80.7 percentile in France. The manufacturing readings tend to be weakest with three of the four non-U.S. rankings below their historic range mid-points. The service sector rankings again excluding the U.S. are between the 65.9 and 80.4 percentiles among the four reporters in the top of the table.