Economy in Brief: September 2022

Nominal money growth is slowing in global money center areas except for the EMU. U.S. nominal money growth has decelerated to a three-month 0.5% annual rate from 4.1% over one year and 8.8% over two years- a sharp pull back. In the U.K., money growth has decelerated to a three-month pace of 3.6% from 4.7% over 12 months and 5.4% over two years. In Japan, money growth that has been better-controlled; it pitches a 3.9% pace over three months compared to 3.4% over 12 months and 4% over two years- more or less steady growth.

By comparison in the EMU, three-month nominal money growth has accelerated to an 8.7% pace from 6.6% over 12 months and 7.2% over two years. These are clear accelerations to the strongest three-month money growth in this grouping- adding that distinction to the strongest six-month pace and the strongest 12-month pace.

The ECB has been a late comer to the monetary tightening parade. Of course, this is a parade Japan has yet to join – but for good reason, its inflation remains moderate. Europe faces unique and significant challenges to its outlook with the energy pipeline from Russia having been damped and then shut- as Russia complains that economic sanctions prevent the shipment of needed equipment to keep the pipeline running.

Credit in the EMU mirrors money growth rates. Private credit is up by 6.6% over 12 months, up at a 7.0% pace over six months and up at a 7.5% annual rate over three months.

Real flows Real money supply has slowed everywhere although less definitively in Japan. EMU money growth is at a 1.1% pace over two years, it then contracts at a 2.3% pace over 12 months, at a 3.7% pace of contraction over six months. Over three months EMU money growth has ticked up to a 0.2% annual rate. Real private credit growth in the EMU shows a drop at 1.4% pace over two years, a drop at a 2.3% pace over 12 months, a drop at a 2.9% pace over six months, and then a lesser pace of decline of 1.0% over three months.

Inflation and growth trends Real money growth in the U.S., the U.K. and Japan show clear decelerations from two-year to one-year with the U.S. and the U.K. both logging money growth declines over 12 months at -3.8% in the U.S. and -3.9% in the U.K. Over six months, the U.S., the U.K., and Japan all log declines in money growth as well as growth decelerations. Over three months growth rates for real balances decline at a lesser pace than over six months in all three countries, but in the U.S. and the U.K. the three-month pace of decline is still a more substantial decline than the pace over 12 months. In Japan, the three-month growth in money is only 0.7%, but that is the strongest on these horizons since the two-year pace of 2.8%.

The all-sector IFO climate gauge fell to -20.1 in September from -13.4 and August, a sharp decline that represents erosion in all major categories. The manufacturing sector registered a -14.2 reading on climate in September, down from -6.8 in August; construction is at -21.6, down from -14.8 in August; wholesaling is at -26.4, down from -21.6 in August; retailing is at -39.8, down from -31.9 in August; and services fell into negative territory at -8.9 after logging a +1.4 reading in August. The readings are lower across the board and all the readings show net negative figures in September.

The percentile standings for the climate readings show how weak the rankings are. The all-sector index is at the 5.3 percentile on data back to 2005, manufacturing has a 7.7 percentile ranking, construction is at a 15-percentile ranking and that's the strongest sector overall. Wholesaling has a 4.3-percentile ranking, retailing has a 0.5-percentile ranking and services have a 1.6-percentile ranking. There is extreme cloudiness, thunderstorms in progress, with no silver linings.

There is simply relentless bad news in the German survey. It's been weakening for quite a period of time after peaking in 2018 and falling for Covid then peaking at a lower post-Covid peak in 2021. This month, rather than slowing down its pace of decline or beginning to reach a low point and flattening out, conditions have eroded and continued to deteriorate by a strong amount on the month. While there has been some let up in the relentless commodity price inflation, and oil prices have fallen from their high, Germany is being threatened by the shutting of the pipeline. That could result in severe energy source shortages over the winter. I believe people are starting to factor in a belief in the worst rather than to hope for the best as the war in Ukraine has turned worse for Russia. That worsening is going to put even more pressure on Russian President Vladimir Putin as it increases the probability that he will try to create as much disaster, dislocation, and chaos outside of his borders as he can using economic warfare- and other means.

The current conditions index also shows declines month-to-month. All sectors weakened on a month-to-month basis in September based on current condition assessments. However, only retailing has a net negative reading at -14. The all-sector current reading falls to 15.4 in September from 22.3 in August. Manufacturing falls to 12.8 from 18.4. The construction sector weakens to 6.9 from 12.6. Wholesaling weakens to 5.8 from 11.0. Services weakens to 22.7 from 30.9. The rankings by sector show readings that are uniformly in the lower 25th percentile or weaker in their respective historic queues of data. The sole exception is the construction sector that hovers above its median reading at 62.8 percentile.

Expectations readings also fell across the board on the month. The all-sector expectations reading fell to -42.3 in September from -31.3 in August. That reading has a -49.2 all-time low; this month's reading is at -42.3. The all-sector expectation reading has a 0.5 percentile standing; it has been weaker only 0.5% of the time since 2005. In fact, all the components have 0.5 percentile standings except manufacturing that has a 2.9 percentile standing and retailing that is at its historic low point.