Economy in Brief: 2022

Business optimism in the U.K. improved in the third quarter to a reading of -21 from a very low reading of -34 in the second quarter. Yet, the U.K. economy continues to be under a great deal of pressure and all the risk factors that had been in play remain in play from the Ukraine-Russia War to the ongoing COVID issues, to the central bank raising interest rates. But optimism is not as negative in the third quarter as it was in Q2. Its standing has improved to a lower 23 percentile level from a lower 9 percentile level previously. While there is considerable improvement month-to-month, it's still a very weak report.

Export optimism improved in the third quarter compared to the second quarter although expectations for capital expenditures for buildings remained at the same reading as in Q3; assessments of capital expenditures for equipment moved higher. Capital expenditure expectations for both categories are quite high with 85-percentile standings for buildings and with a 91-percentile standing for equipment.

The number employed over the last three months backtracked slightly in Q3 but still has a 94.5 percentile standing with the trend still and a 96-percentile standing although it also backed off in the third quarter. New orders from three months ago fell back to a +11 reading from +22 in the second quarter marking a 73-percentile standing, but the volume of orders expected three months ahead improved; that response has only a 57-percentile standing. Domestic orders versus expectations show a stronger standing for current orders compared to expectations; the same is true for foreign orders over the last three months versus expectations for three months ahead. Expectations for domestic and foreign orders each show sub-median readings for three months ahead.

The output metric fell back in the third quarter to a +6 reading from +19 to a standing at its 55th percentile; expectations for output for the period ahead also fell to a reading of +6 from +17 in the second quarter but that yields a low standing in its 39th percentile below its historic median.

Finished stocks record a little assessment change between quarters with the standing in the 90th percentile while the three-month-ahead assessment for stocks drops to a -10 reading from +1 to a below-median 42.5 percentile standing.

Next is series of readings on the cost of output: domestic orders and foreign orders show extremely high readings for both the current and the expected values over the past three months as well as for the next three months. All these metrics have high 90th percentile standings. Clearly inflation is expected to be engaged.

On balance, the quarterly CBI series shows an improvement in expectations although still a great deal of weakness and clear expectations that inflation is going to continue to be a factor in the period ahead.

You don't have to put too fine a point on it this month to see the trend. The flash PMI readings show weakening across all the countries and all the categories for which we have flash readings in the table for July. There's growing weakness in the EMU, Germany, France, the United Kingdom, Japan, and the United States. There is growing weakness in manufacturing and services everywhere in July – except for manufacturing in the U.K. No judgement is required here.

In June, the readings were similarly weak but not as unequivocally weak. In June, the U.K. had a stronger services sector and a stronger headline (composite) while Japan also had a stronger services sector and a stronger headline with all other countries and sectors finding weakening month-to-month. May found only one composite index getting stronger that was Japan on the strength of a better services sector while there was also strengthening for manufacturing in Germany that was not enough to support the composite.

We also look at trends with three-, six-, and 12-month averages. These averages in the table are lagged by one month; they're only constructed over final data not over the preliminary or flash data. On this basis, a little bit more strength appears in the numbers and particularly a surprising result over three months compared to the three months that appear individually in the table; but then for the moving averages of three-, six-, and 12-months we are not including the month of July. However, at the far right of the table the change calculations are done on up-to-date data, including the flash readings, and there you see more widespread deterioration particularly over three months.

Even so, it's clear from the sequential averages that there is weakening in progress. And it's clear from the change data on the far right that over three months the weakening is in fact quite broad based and rather severe.

We can also try to get more of a sense of what things are like in absolute terms by looking at the queue standing or ranking data. As of July, only three readings in the table stand above their medians calculated back to January 2018. Those exceptions are the services sector in the U.K., the services sector in Japan, and Japan's composite; the latter barely beats the 50% mark at 50.9%. The United States this month comes in with the weakest data in the table with a composite reading in its lower 5.5 percentile based on a services sector that is in its lower 5.5 percentile as well. The EMU index challenges U.S. weakness with the ranking at its lower 14.5 percentile that comes about not because of extreme weakness in one sector but because of paired weakness in manufacturing and services with standings in roughly the 30th to 23rd percentiles of their respective rankings. This weakness occurs because of the weight of Germany in the EMU. Germany has an overall ranking in the 7.3 percentile, close to the U.S. and gets there the same way the EMU does, with paired weakness in manufacturing and services with rankings in the 20th the 30th percentiles, in rough terms.

The United States, the European Monetary Union, Germany, and France all have composite readings that are below the readings from January 2020 before COVID struck. This is not a good development.