Economy in Brief

The table focuses on German consumer confidence from GfK, but it also includes the most up-to-date metrics for Italy, France, and the United Kingdom. For all these countries, consumer confidence is extremely low. In the case of the German GfK measure, for which there's an advance estimate for August, the value of -30.6 is the lowest in the history of this survey. For France, the consumer confidence index at 79.5 has been lower less than 1% of the time. In the U.K., that consumer confidence measure for July has been that weak or weaker less than 1/2 of one percent of the time. In Italy, consumer confidence has been weaker 18% of the time. All of these are extremely low values for consumer confidence.

As inflation has risen globally, consumer confidence has fallen. This has created some confusion about economic performance as there also is concern about economic slowing and the potential for recession. However, what we see shows clearly that economic performance can still be pretty good even if inflation performance is very bad; and yet consumer confidence can register a very low reading in such circumstances. Perhaps the best example of this is in the United States where the unemployment rate remains near 40-year lows and where consumer spending continues to plow ahead and yet with extremely high inflation the U.S. consumer sentiment index, as measured by the University of Michigan survey, is near its historic low. Despite these conditions of low and falling unemployment and advancing consumer spending, many in the U.S. think the economy is in recession. It's confusing…

It's not possible to look at a consumer confidence number and to really know why consumers are feeling as bad as they are. Even the surveys that give detailed readings on the consumer that may allow you to extract certain elements that are particularly bad, it's always hard to know exactly what it is that is nagging at consumer expectations the most and causing the loss of confidence.

In the German survey, there are three components that are available with a one-month lag. These components refer to the reading of -27.7 for July rather than the -30.6 reading for August. However, both are quite weak numbers, and the component values ought to be relevant for what's happening in August even though these are, formally, numbers from July.

In July, economic expectations in Germany fell to a reading of -18.2 from June's -11.7. The economic index has been lower than that reading less than 10% of the time, historically. Income expectations in July fell to a -45.7 reading from June's -33.5. The income expectation rating is the lowest on record. The propensity to buy slipped to a reading of -14.5 in July from -13.7 in June; at that level, the propensity to buy has been weaker historically about 18% of the time.

Money slows as credit grows… faster Money illusion is an economic term for the distortion that occurs when a significant difference develops between the money cost of an item and the economic burden of purchasing it. For example, I have joked that inflation has made me stronger because I did not used to be able to go to the store and so easily carry home $100 worth of groceries. The illusion in this example is that $100 worth of groceries is the same thing it used to be. Of course, I am not stronger. Inflation has not made me stronger. Inflation has made my load lighter by causing $100 to purchase less than it used to. Money illusion is meant to clarify the fallacy of thinking that your wages are really higher or that your income is higher because they have risen in dollar terms when inflation is growing faster than your wages or income are rising and when your purchasing power has fallen.

To clarify those points, I have created the table below that looks in the upper panel at nominal growth rates for money and credit and then directly below on the same frequencies creates growth rates for the inflation-adjusted (real) flows.

The nominal flows in the upper panel show that money supply is decelerating in the European Monetary Union; it grew at 7.7% over three years, at a 6.8% pace over two years, and at a 6.1% pace over 12 months, but over three months the annualized growth rate is now down to 4%. There is also a deceleration in the real balances on those same same timelines. Three-year real balance money supply growth in the EMU is 4% and over two years it's 1.5%, but over 12 months it's declining at a 2.3% annual rate, and over three months the money stock in real terms is falling at a 3.2% annual rate.

In both cases, money supply is decelerating. So in some sense, you could say that the signal is the same; however, since economists think that the absolute growth rate of money supply matters, there's a big difference between saying that money is growing at a 4% annual rate over three months or that the real money stock is declining at a 3.2% annual rate over three months.

Clearly the ECB policy has been tightening regarding money supply. Skipping past the credit columns for the moment, we see the same thing going on for money supply growth in the U.S. and in the UK, and to a lesser extent in Japan. The U.S. money stock decelerates from a huge 13.7% growth rate over three years to a decline at a 1.3% annual rate over three months. The U.S. real money stock grows at an 8.3% annual rate over three years but is now shrinking at an 11.1% annual rate over three months (yikes!). The U.K. shows money growth over three years at a 7.8% pace, decelerating to a 2.7% annual rate over three months. The U.K. real money stock grows at a 4.1% pace over three years and is now declining at a 10.2% annual rate over three months. Japan’s nominal money stock grows at a 5.5% pace over three years and slows to a 3.5% pace over three months. Over three years Japan’s real money stock rose at a 4.8% annual rate; over three months the real money stock in Japan is still growing but has slowed to a 0.7% annual rate. Japan had much lower inflation than elsewhere, as result its distortions and the unwinding of its distortions creates less distress.

These statistics make it clear that money supply has slowed, and that the real money stock is falling in most of the major money center countries. Looking at interest rates alone may hide the degree of tightening that we're seeing on the part of central banks. Of course, this judgment is always complicated because the money figures that are reported are called ‘money supply’ but they are, of course, the result of supply and demand interactions in the marketplace that occur as the central bank sets the short-term interest rate. So, for any given interest rate, if demand is shifting, that can cause a change in the money growth rate even as the central bank holds the nominal interest rate target steady. It's highly likely with the weakening economy in Europe that money demand is weakening and that the weakening that we see in the growth rates of the money stock reflect not just to squeezing by the central bank but also a pullback in money holding patterns on the part of the public.

The euro area offers an interesting presentation on what is going on with credit demand. Credit to residents in the European Monetary Union is up at a 3.9% annual rate over three years; that drifts down to 3.8% over two years but then ratchets up to a 5.4% annual rate over 12 months and further to 6.7% at an annual rate over three months. However, credit - deflated for the effects of inflation - shows three-year growth at a 0.3% pace falling to -1.3% pace over two years and falling to -3% over 12 months, then it ‘speeds up’ slightly to fall at a slightly slower -0.8% pace over three months. What we see here is that as nominal money supply has slowed, nominal credit growth has increased. This may be evidence that the tighter credit policies in the EMU are starting to work and that transactors have been forced into the credit market to borrow to meet their business and personal needs. While real money supply (demand?) is falling sharply in the EMU, real credit growth has also started to fall but is falling at a slower pace as nominal credit speeds up.

The same trends pertain to private credit in the EMU where the three-year growth rate for nominal credit is at a 4.2% pace; that accelerates to a 7.1% annual rate over three months against real credit balances that rise at a 0.6% rate over three years then drop to a -0.4% pace annualized over three months. The private sector in these credit statistics shows signs of being under stress and needing to increase credit use to stay afloat. I make this judgment rather than a judgment that the economy is speeding up and increasing its credit demands because the underlying economic statistics show there is economic slowing in place. When there is economic slowing, monetary tightening, and an increase in credit demand it is much more likely to be the product of distress.