Economy in Brief: September 2022

The Confederation of British Industry (CBI) industrial trends survey for September registers an improvement in total orders. It moved up to a September reading of -2 from -7 in August. The reading had been +8 in July. The three-month average is zero, and that's against a six-month average of +10, and a 12-month average of +16. On that perspective, we can see that the assessment for orders has been deteriorating despite the small improvement month-to-month from August to September.

However, historically, the readings for orders tend to be weak. As a result, the -2 September reading is still strong-to-firm when measured against data from 1991 forward; September has a 75th percentile standing on that timeline. Over this period, orders have been higher than -2 only about one-quarter of the time. Over a more recent timeline, from 2015 forward, the ranking is at its 47th percentile, slightly below its median. The median for ranked data occurs at the 50th percentile. In broad historic context, this is still a relatively firm number; however, when compared to data since 2015, this is only an ordinary reading.

Export orders mimic the headline. They register a -8 in September which is an improvement from -12 in August; but August was unchanged from July. The August reading for export orders is stronger than its -11 three-month average although weaker than its -4 net reading for the six-month average and its -3 value for its 12-month average. The rank standings for export orders also mimics the rank standings for total orders. The ranking from 1991 is at a 70th percentile mark and the standing from 2015 has a slightly stronger but not too different at a 51st percentile mark. Once again, the orders are strong relative to the broader sample and weaker relative to the more recent sample since 2015 and the ranking on that latter period still registers near the neutral 50% reading.

The rating for the stocks of finished goods is stronger in September, up to +6 from +2 in August. This compares to a -7 reading in July and weaker readings over three and six months, but the much weaker 12-month average is at -9. The stocks readings are always hard to evaluate since rising inventories could be a sign of confidence or could be a sign of sales not going very well, leading to unintended inventory accumulation.

Looking ahead, industrial output volume for the next 3 months has a pronounced drop, falling to -17 compared to -2 for August. July had a + 6 reading making the three-month average -4; that compares to a six-month average of +8 and a 12-month average of +18. The outlook has deteriorated quite sharply over this period with September being a watershed, with the bottom falling out of the outlook. In fact, the ranking for the September value for the output outlook is in the bottom 5.8 percentile of its historic queue of data back to 1991. That's an extremely weak reading; over the more up-to-date comparison from 2015, the ranking is still in the bottom 7.7 percentile, not much different. Industry in the U.K. appears to be battening down the hatches and preparing for a storm ahead, a common theme among western European economies.

One reason for this dismal outlook on production may be the outlook for prices. Average prices expected over the next three months stepped up slightly in September to a reading of +59 from +57 in August. Like the data above, these are still net diffusion readings but with much higher values. Those recent readings compare to a reading of +48 in July. Compared to the sequential averages, the September reading is only slightly lower than the +61 reading for the six-month average and the +65 reading for the 12-month average. Given how much inflation has progressed, the outlook for inflation in the U.K. does not appear to have improved very much. There appears to be a lot of inflation pessimism there and that pessimism is also reflected in weak expected output.

The data for industrial production (IP) lag the CBI survey data which are quite up to date since it's only late-September and we have a September estimate in the CBI already. Industrial data on IP are up to date through July and on that basis the monthly July change in industrial production in manufacturing was zero. The change over three months was +0.4% at an annual rate; there's a roughly 2% annual rate decline over six months and a 1.1% rate of increase over 12 months. The performance of manufacturing industrial production during this period has been weak with a tangible decline. The ranking for the overall growth rate for manufacturing industrial production leaves it in its lower 36th percentile over both ranking periods since 1991 and from 2015. That’s a lower one-third reading and the economy is still growing- some fear recession lies ahead.

At today's meeting of the Federal Open Market Committee (FOMC), the Fed announced a 75 basis point increase in the target for the Federal funds rate to 3.00% - 3.25%. It was the third consecutive increase of that magnitude and places the rate at the highest level since January 2008. The Fed "... anticipates that ongoing increases in the target range will be appropriate." The move was expected by the Action Economics Forecast Survey.

The statement accompanying today's action read, "Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low."

"Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures."

In addition, the Fed will continue reducing its portfolio of Treasury securities and agency debt and agency mortgage-backed securities.

Today's action was endorsed by all members of the FOMC.

The statement issued following today's meeting can be found here.

Make no mistake about it this is not the Nestea™ plunge - the pause that refreshes. The European Monetary Union (EMU) current account in July dives to a deficit of 19.9 billion euros after rebounding to a small €4.2 billion surplus; an earlier €6.9 billion deficit was logged in May. The balance on the goods account is at an €18.3 billion deficit in July after a €0.3 billion deficit in June. The goods balance has been eroding for quite some time. Changes in the current account balance over three months to six months to 12 months show consistent erosion. The goods balance has deteriorated by €46.6 billion over 12 months, by €28.2 billion over six months and by €18.2 billion EUR over three months. While current account transfers remain deeply negative, the change in transfers has been diminishing from €3.1 billion over 12 months, a wider €3.3 billion deterioration over six months which has shrunk to €1 billion of deterioration over three months.

The three largest EMU economies Germany, France, and Italy show that Germany still has a surplus in July, but France and Italy both post deficits on their current accounts. For France the deficit is €5.3 billion; for Italy it is €3.8 billion. However, when we look at the period-to-period sequential changes, each of these three countries shows deterioration over each of the three horizons; Germany may still have a surplus but it, too, is eroding. If we annualize the changes over the respective periods, the deteriorations are also getting progressively worse - except for Germany.