Economy in Brief: October 2022

French consumer confidence rebounded in October to 81.9 from a reading of 79.5 in September. The 81.9 level is close to the August level of 82.2 and this reading has been fluctuating in a range of 82 to 79 for the past five months. Today's reading is not a surprise; it's not news; the month-to-month fluctuation is not significant. It's simply an indication that confidence remains in this very low habitat where it's been in the aftermath of the Fed beginning to raise rates aggressively in March and the start of the Russia-Ukraine war in February.

Living standards over the last 12 months in France posted a -79 reading, the same as in September, among the weaker readings over the last five months. The outlook for living standards over the next 12 months has a -64 reading that stacks up as one of the stronger readings over the last five months but not by a lot.

Expected unemployment over the next 12 months has a +23 reading the same as in September. These two numbers are significant steps up from what they had been from June to August. Price developments show prices over the last 12 months with the reading of 61 which is in the middle of where they've been for the last five months. The reading over the next 12 months is flat that leaves it hovering and just slightly weaker territory than it's been for most of the last five months.

The assessment of whether it's a favorable time for savings declined month-to-month to a reading of 26 in October from 31 in September, but these generally reflect stronger readings than for the previous three months. The ability to save over the next 12 months has a -5 reading, the same as in September and these represent deteriorated readings over the last five months.

Responses to the survey question 'is it a favorable time to make a major purchase' log a -37 reading in October which is roughly where it's been over the last five months - not much change.

Households assessed their financial situation over the last 12 months as a -29 reading, a slight improvement from where it had been in the previous four months. The assessment for the next 12 months has a -23 reading which is only slightly improved from its habitat over the last five months.

Where these readings ranking In terms of the rankings for these various responses, the household confidence index has a 3.1 percentile ranking (standing) which is extremely weak although it's only in the same territory that it's been over the last five months or so. This is a lower 3% of habitat reading among all readings since 2001 and that's a period of nearly 22 years. Living standards both past and expected for the next/pervious 12 months also have extremely weak readings in their lower 3 percentile. Unemployment expectations stand higher in their 34th percentile; workers are beginning to get a little concerned over the outlook for unemployment. Price developments show that prices over the past 12 months as well as over the next 12 months have a 95 to 97 percentile standing compared to historic expectations. Inflation has been and is expected to remain high. The favorability of the environment to save is good with an 81.2 percentile standing. However, the ability to save over the next 12 months is more moderate with the roughly 60th percentile standing. The favorability of making a major purchase is a lower three percentile standing in the same weak relative habitat as the household confidence and living standard standings. The financial situation over the last 12 months is assessed at a 21-percentile standing. But looking to the next 12 months conditions are expected to worsen with only a 7-percentile standing. Clearly these are challenging times for French households and are recognized as such.

Pre-COVID comparisons are disappointing The transition of these current readings compared to the pre-COVID. Show a great deal of weakness the household confidence index is weaker by 23 points, living standards are weaker by over 40 points, the ability to save is weaker by four points, the spending environment is weaker by 27 points, the financial situation both current and next are between 15 to 20 points weaker. The things that are stronger are not improvements they include is the expectation for unemployment that is 25 points higher and the readings on price developments over the past 12 months that are 95 points higher and for the next 12 months that are 23 points higher. However, the favorability of the environment for saving also shows improvement compared to the pre-COVID; that reading is 20 points higher.

U.K. survey gives a mixed view of short-term industrial trends The U.K. survey from the Confederation of British Industry (CBI) on industrial data shows total orders at a -4 reading in October compared to a -2 reading in September and -7 in August. Despite this waffling short-term progression, strength in orders has been slipping more broadly with a 12-month average at +14, a six-month average at +7 and a three-month average at -4. The October orders reading itself has a queue standing on data from 2015 at its 41st percentile, below its median (the median resides at a level of 50th percentile). However, on longer-dated data back to 1991, the queue standing for the orders variable is substantially stronger at its 70.6 percentile, well above its median. The U.K. economy has been relatively stronger since 2015 accounting for the lower standing of the October reading over this more recent period. Evaluated over the longer time series of data, the current reading is less troubling and relatively firm compared to the short-dated observations. These differing baselines make it more difficult to evaluate the U.K. readings with confidence.

The U.K. situation However, none of these observations mask the fact that the U.K. economy is weakening and that it faces turmoil in its financial markets, weakness for the pound sterling, and political difficulties, having just placed its third Prime Minister in office this year. Inflation in the U.K. remains high although it shows signs of having peaked and, perhaps, it is ready to move lower. But current inflation in the U.K. is too high and the task ahead for the Bank of England is made more difficult by the fact that the economy has weakened.

The rest of the current survey The CBI survey shows weak export orders at a -14 reading in October from -8 in September and -12 in August. This series has an average of -4 over 12 months as well as over six months that deteriorates to an average of -11 over three months. The order series for exports has a queue standing in its 37th percentile on data back to 2015 but improves to a 55.4 percentile standing on data back to 1991. One reading has a weak standing; the other is moderate

Stocks of finished goods have an October reading a +7 compared to +6 in September and +2 in August. The 12-month average is -7, rising to -1 over 6 months and to +5 over three months. Inventory levels are showing some signs of having been rebuilt. With orders fading, this may not be a desired trend.

The outlook Looking ahead, the U.K. output volume reading for the next three months has improved to +7 in October from -17 in September and -2 in August. However, looking back at the time series, the average over 12 months is 16, the average over six months is +6 and the average over three months is -4. The sequential averages show that there's a deterioration in the outlook for output volume three-months ahead even though the October monthly figure itself shows a strong turnaround from a very weak reading in September. We know enough about the U.K. economy, and its difficulties to be somewhat skeptical about the notion that there has been a sharp turnaround in the output volume outlook.

One of the reasons that the output outlook for the U.K. economy remains difficult and strained is because of inflation. In October the outlook for prices three-months ahead fell to 46 from 59; the August reading had been 57. The 12-month average for the outlook for prices three-months ahead is 64 following a reading of 57 over six months and 54 over three months. There is a monthly progression showing pressure is coming off prices and a sequential average progression that reinforces that trend. That's good news; however, the price level numbers are still extremely strong. The price reading for October- despite its decline- still has an 83.3 percentile standing on data since 2015 and a 96.6 percentile standing on data from 1991. That's the inflation part of the outlook. Output volume over the next three months has only a 33.3 percentile standing compared to data since 2015 and only a 40.8% standing compared to data since 1991. Either way the look-ahead for output volume is below its median despite the fact that that series has improved in October. Inflation improvement is too small to be construed as good news yet.

Industrial output readings lag but tell a clear story At the bottom of the table, we include the summary data for U.K. manufacturing output. The most up-to-date reading for that is in August and it shows a 1.6% drop month-to-month. The three-month change in output shows a 13.2% drop at an annual rate, the six-month change shows an 8.1% drop at an annual rate, the 12-month result shows a 6.7% drop. These progressive growth rates show how industrial output has been declining more rapidly over recent periods. And the ranking of the IP data over either period is unambiguously weak in the lower 2.7% of its queue on either timeline. However, the output data themselves from the industrial production indicator are only up to date through August. The CBI survey is up to date through October. But it is unlikely that those trends have turned around in any significant way because of the clear forces have been battering the economy and because of the impact on financial markets.

PMI data for October are weak on a broad front, falling for all composites in the table except for Japan and falling in all these sectors except for manufacturing in the U.K. and for services in Japan. In September, the U.S. is the exception with stronger readings for the composite, manufacturing, and services. Japan has a stronger composite and services reading in September as does France, but the United Kingdom, Germany, and the European Monetary Union all show weaker readings for all three components. In August, there are weaker readings for all the composites and most of the components with the exceptions only for manufacturing in France and manufacturing in the U.K. that both were stronger in August compared to July. The picture that emerges from this is widespread weakening.

Three-month, six-month, and twelve-month data in the table I bet it's turn hard data they exclude the October reading which is a flash reading. Based on these averages, all the three-month readings are weaker than all the six-month readings. The six-month readings are weaker than all the 12-month readings except in Japan where both services and the composite are stronger. Over 12 months, there's more variability with 10 of the 18 readings stronger on the month.

High-low standings The percentile standing which positioned the month’s reading relative to the high-low readings since January 2018 show relatively moderate and positive standings. The U.S. is the exception with a 48.6 percentile standing. Japan logs a 94th percentile standing; France logs an 80th percentile standing; the European Monetary Union logs a 71.4 percentile standing. However, these are the current index paced in a range relative to the highest and the lowest readings during this period. It's a much more powerful reading to look at the ranking of the current month among all the readings since January 2018.

Queue standings The queue standings rank the current month among all the readings since January 2018 and here the rankings changed remarkably. Japan has the highest composite standing at its 72nd percentile. After the Japan reading, it drops all the way down to a 27.6 percentile standing in France and from that we're down to a 6.9% standing in the European Monetary Union, in the U.K., and in the U.S. There's clearly a proliferation of weakness. 11 of 18 queue percentile standings reside below the 15th percentile mark.

The net drops in PMIs In October, the unweighted change among this group of countries and the EMU is for the composite to fall by 1.2 points, for manufacturing to fall by 0.9 points, and for the services reading to fall by 1.1 points. Over three months, the average drop is 1.9 points for the composite, 3.1 points for manufacturing and 1.9 points for services. Over 12 months, the average drop is 6.5 points for the composite, 8.9 points for manufacturing and 6.6 points for the composite.

Comparisons to pre-COVID levels Compared to just before COVID struck, in January 2020, there are only four readings in the table that are above that January 2020 level. They are all the readings for Japan and the manufacturing reading for Germany – the German reading is higher by only 0.4 points. On average, since January 2020, the composites are weaker by 3.6 points, manufacturing is weaker by 1.4 points, and services are weaker about 4.0 points. The boom-bust cycle related to COVID has now left us at a net weaker level. Not only are the PMI readings weaker but they're decaying; they have more negative momentum.