Economy in Brief

Today’s data from the UK covering the housing market and the manufacturing sector suggest the economy is rolling over. The good news is that inflationary pressures appear to be easing at the same time.

The key elements of note from these data releases were as follows:

• The Nationwide house price index fell by 3.4% in the year to May, the biggest annual decline since July 2009. Average prices now stand at around 4% below their August 2022 peak.

• This news chimed with data from the Bank of England showing net mortgage lending slumped in April. Mortgage lending specifically declined from net zero in March to £1.4 billion of net repayments in April. Excluding the COVID era, this is the lowest level on record.

• That data chimed too with the accompanying news for net mortgage approvals, which fell from 51,500 in March to 48,700 in April.

• As for manufacturing this latest S&P Global manufacturing purchasing manager’s Index (PMI) fell to 47.1, down from 47.8 in April, although upwardly revised from the earlier flash estimate of 46.9. The details of this report were equally soggy, showing falling new orders and sharply rising finished inventories.

• Brighter news, however, emerged on the inflation front. For example, there were signs of further easing in supply chain pressures. And this was accompanied by a sharp retreat in input and output price pressures as well. In fact, average input costs actually fell for the first time since early 2016 (see chart).

The Asian PMIs show somewhat mixed patterns over the last year and across the recent three months. In May alone the average manufacturing reading stepped back to 49.8 from 51.0, leaving May weaker than April or March. Manufacturing PMIs for this select group of Asian countries improved in only one-third of the estimates in May, compared to improvement for 50% of them in April and one third of them in March. None of these trends is particularly striking.

However, the three-month averages show that 44.4% of the countries experienced increased PMIs compared to the six-month average. Over six months 55.6% improved compared to the 12-month average. And 55.6% improved for the 12-month average compared to the year-ago 12-month average.

The unweighted standing for manufacturing overall is at its 43rd percentile with five of the reporting countries having readings below their respective 50th percentiles. That means they lie below their medians for the period. Thailand has the strongest standing with a 96.2 percentile reading, while Myanmar has a reading at its 84.9 percentile. For the most part, the manufacturing percentile standings are moderate to low.

There are few services observations; China and Japan present services/nonmanufacturing observations. The Japanese figures here are still preliminary. Still, services from 12-months to six-months to three-months are trending stronger there. Across the individual recent three months, the Japanese services sector has remained firm. China’s nonmanufacturing readings weaken over the recent three months.

May is a showing of mixed performance in Asia for services. Japan shows weakening PMI services data from 12-months to three-months with a small bounce in between, while China shows slight strengthening over those same horizons for nonmanufacturing. Neither country, however, shows markedly strong moves in either direction.

The bottom line is that Asia seems to be listless for both manufacturing and services, without strong momentum. Percentile standings indicate that weak levels accompany the meandering momentum trends in manufacturing. PMI readings with few exceptions are weak compared to where the various PMI levels have been since January 2019. Services tell a different story of relative firmness enduring.

Japan’s industrial output was flat in April after rising by 0.2% in March and by 4.5% in February. Manufacturing output fell by 0.2% in April after rising 0.8% in March and gaining 4.9% in February. Despite the flat or declining output in April for industry overall and manufacturing, Japan carries momentum from strong gains in February and further gains in March after stumbling in a deep hole in January. As a result of this output pattern, these weak-seeming monthly numbers are setting output up for a strong gain in the second quarter relative to what was a disappointing first quarter in Japan. Overall output is growing at an annual rate of 10% in the second quarter as manufacturing output is growing at a 12.1% annual rate. These early returns for the second quarter occur with only one month's worth of data in hand.

Sequential growth rates show total industry output growing 0.2% over 12 months, advancing at a 0.6% annual rate over six months and exploding at a 20.2% annual rate over three months. Manufacturing output is up by 0.6% over 12 months, growing at a slightly faster 0.8% pace over six months and then bursting out at a 23.9% annual rate over three months.

IP manufacturing sectors Sector growth rates show acceleration in progress for consumer goods. Their 7.4% growth over 12 months is substantially preserved over six months and then mushrooms to a 24.1% annual rate over three months. Intermediate goods output falls by 3.3% over 12 months, improves to a decline at just a 0.9% pace over six months and then surges higher to a 25.8% annual rate over three months. Investment goods have a more complicated pattern, with output rising by 1.6% over 12 months, then giving ground to fall at an 11.4% annual rate over six months but recovering to surge at a 26% annual rate over three months.

On monthly data, the manufacturing sectors show three output gains in a row for consumer goods, and gains in April and February with a decline in March for intermediate goods, while investment goods display three monthly increases over February, March, and April. On balance, the second quarter looks like it's on its way to delivering strong growth in Japan. The quarter-to-date growth rates for consumer goods, intermediate goods, and investment goods lie in a range of 15% to 20% at an annual rate. These are quite strong growth rates for output.

Other industry Mining is a different story, showing output declines in February, March and April although the output declines diminish in April. Mining shows an 8.9% output drop over 12 months that worsens to a 17.6% annual rate decline over six months and worsens further to a 22.4% annual rate decline over three months. The mining sector in the Japanese economy is weak by months as well as sequentially weak and is still weakening over the past year.

Utilities for electricity & gas show declines in February and March month-to-month but bounce back as output increases by 1.4% in April. Sequentially utilities are showing a weakening trend with a 5.7% decline over 12 months, a 6.9% annual rate decline over six months and a 19.8% annual rate decline over three months. It's a bit of a surprise that electricity & gas usage can sequentially decline while manufacturing, for the most part, is accelerating.

Both mining and electricity & gas show output declines in progress in the second quarter with mining showing a 21.4% annual rate decline early in the quarter and electricity & gas showing a 14.3% annual rate decline early in the quarter.

Despite what looks to be good momentum over the last 12 months, Japanese output has not generally been impressive. Total industry output is still 2.5% lower than it was in January 2020 before COVID struck most of the global economy. Manufacturing output is lower by 3.4%, consumer goods output is lower by 2.5%, intermediate goods output is lower by 5.6%. Only investment goods show output stronger in April 2023 than it was in January 2020 with a gain of 2.4% over that three-year period. Mining and utilities both show weak output with mining weaker by 16% than it was in January 2020; utilities output is weaker by just 1.9%.