Economy in Brief

The Zew economic indicators for the macro economy for the Euro-Area, for Germany, and for the US decline significantly in October. The Euro-Area diffusion reading fell from -58.9 in September to an October reading of -70.6. In Germany, the diffusion index deteriorated to -72.2 in October from -60.5 in September. And the US deterioration was from a +1.2 reading for September to -13.4 in October. These are substantial deteriorations. They have left the Euro-Area with a queue standing in it's 18.9th percentile, Germany in its 19.1 percentile, and the US and its 31.4 percentile. These are reading that have been lower only one third to one-fifth of the time (The US has the less weak standing).

Economic expectations for Germany and the US showed mixed trends. For Germany, the macroeconomic expectation reading improved very slightly to -59.2 in October from -61.9 in September. This reading still leaves it below the August-22 level. And the US the macroeconomic outlook deteriorated to 45.6 in October from 39.6 in September. Both the German and the US queue standings post October readings that are extremely weak. The German reading has been this weak or weaker 1.4% of the time; the US reading has been this week or week or 5.7% of the time – not much difference.

Inflation expectations that had revived a little bit in September have been sharply reduced in October as their trend decline continues. The Euro-area inflation expectations reading fell to a -35.8 diffusion index reading in October from -12.1 in September; in Germany inflation expectations fell to -35.2 in October from -9.7 in September. In the US inflation expectations fell to minus -71.0 in October from -50 in September. The Zew financial experts are coming to fear inflation less as they come to recognize weaker macroeconomic conditions and as they continue to hold extremely weak expectations for future growth. Inflation expectations have been reduced to a 4.4 percentile standing in the Euro-Area, to a 14.8 percentile standing in Germany and to a new all-time series low in the US. This does not mean inflation is going away; but it means the assessment is that there is a high probability that inflation has peaked. At some point diminished economic activity and poor expectations for the future must result in less inflation pressure.

However, on the interest rate front for the Euro-Area we see a diffusion reading of 92.6 in October compared to 93.3 in September it's a small reduction that probably doesn't really mean anything because the readings are still so high- in the 90th percentile. Clearly the Zew experts continue to see the ECB raising rates. And in the US also there's a slight diminution of pressures in short term rates as the October diffusion index falls to 87.3 from 89.7 in September. That's another very modest and not noteworthy change in expectations. And the case of the Euro-Area, that diffusion reading is in its 98.9th percentile. For the US, the reading is in its 91st percentile. In both cases expectations for higher short-term rates are extremely strong. And that is more the point than that there was some very modest backing off.

Moving on to long-term rates, we see pressure coming off long term rates expected in both Germany and in the US. In October, the German diffusion index falls to 48.7 from 55.2 in September. In the US, the reading falls to 40.6 in October from 50.7 in September. The lower diffusion readings imply less pressure on long term interest rates. In Germany, the standing of that diffusion index is in its 60.9 queue percentile, showing that expectations for long rate increases are above their historic median ( the median occurs that at a queue standing at the 50th percentile). In the US, the queue standing is at its 41st percentile, below its historic median.

Stock market expectations have improved slightly for the Euro-Area area and in Germany; they are marginally weaker in the US. In the Euro-Area stock market expectations flip from a - 5.2 reading in September to a + 2.5 reading in October. Similarly, in Germany, the October reading flipped to a +1.2 reading from a -5.9 reading in September. The US the October diffusion reading edged down to 11.7 from a September reading of 12.5. The Euro-Area and German readings are still both in the lower two percentile of their historic queues of observations for stock market expectations. And in the US the reading is a bottom 25 percentile reading at its 25.7 percentile mark. These are weak queue percentile standings for all three areas; however, the weakest standings are for Germany and the Euro-Area.

Japan's industrial output surged in August with manufacturing output rising by 3.5% month-to-month after rising 0.8% month-to-month in July and rising 9.1% month-to-month in June. The three-month growth rate is off the charts at 68% annual rate. That compares to an annualized growth rate of 8.3% over six months and of 4.3% over 12 months. Clearly there is some catch-up going on with industrial production. Japan is planning stimulus programs for its economy.

Surveys show some mixed progress, but lag the strength in the IP report Survey data for August failed to show the same kind of enthusiasm as the industrial production report, which showed an upward revision in today’s release. The economy watchers index, a diffusion index report, rises to 45.5 in August from 43.8 in July with its future index rising to 49.4 in August from 42.8.

Sector indexes from Teikoku, another diffusion report, show manufacturing slipping to a diffusion reading of 41.0 in August from 41.3 in July; retailing steps up to 36.3 from 35.7; wholesaling slips slightly to 39.2 from 39.5; services move higher to 45.4 from 44.4. The construction sector is better by just a few ticks at 43.3 in August compared to 43.1 in July.

The METI indexes for industry and services both showed monthly gains.

Growth vs. activity levels Evaluating the economy watchers and on the Teikoku indexes by their growth rates, we'll find more strength in the economy watchers survey.

The economy watchers indexes show rankings based upon year-over-year growth in the 90th percentile for the headline index, for the retail sector, for eating & drinking places, and for the service sector readings. However, if we evaluate those same sectors based on the levels of the indexes, since these are diffusion indexes, we get a view of the level of performance rather than an assessment of growth. The economy watchers index has a 33.6 percentile standing for its level, below its historic median; the retail sector has a 40.6 percentile standing; eating & drinking places have a 15.4 percentile standing; the services sector has a 25.9 percentile standing. Viewing employment overall, employment increased to a diffusion reading of 52.5 in August from 50.7 in July, with the growth ranking in its 73.4 percentile but with an index standing that is much weaker, in its 42.7 percentile. Pitting the growth rankings against the index level rankings, it's quite clear that Japan is still relatively weak in terms of performance, and this is what the index level ranking tells us. However, the growth ranking tells us that there has been a spurt which has not yet elevated growth to a strong position but there has been a spurt that has boosted the economy short term.

The Teikoku indexes show somewhat the same phenomenon with the growth rankings generally above the diffusion index level rankings. The manufacturing sector is an exception with a growth ranking at its 42nd percentile and an index level ranking nearly the same at the 43rd percentile. But retailing has a 74.1 percentile growth ranking compared with 37.1 percentile level ranking; wholesaling has a 60.8 percentile growth ranking compared to a 44.1 percentile index ranking; services have an 80.4 percentile ranking on growth compared to a 39.9 ranking on its index level.

Separately, the METI indexes shown improvement for industry on the month and an improvement for the tertiary (or services) sector month-to-month. The growth rankings of these two sectors put industry in the 88th percentile and the tertiary index growth rank in its 95.7 percentile. However, the levels of these surveys show index rankings in the 52nd percentile for industry and in the 39th percentile for services, both significant step backs.

Orders Japan orders failed to confirm the near-term strength in growth as in August total orders, core orders and foreign orders all fall sharply with only domestic orders moving up by 1.9% month-to-month. The growth ranking for orders reverses the earlier trends. The total growth ranking on year-over-year growth is 34.7%; however, the level of the index is at its 90.9 percentile. Core orders have a 66.9 percentile ranking on growth, compared to a 91.6 percentile on levels. However, the orders data aren't comparable to the other data in the table since orders are an ordinary accounting time series that adds up the value of orders; orders are not a diffusion index. The other series are diffusion indexes that measure output breadth. Over time we naturally expect an orders series based upon ordinary data to grow and therefore the level index will tend to grow even if it's growing insufficiently. Diffusion industry indexes don't have that same property.