Economy in Brief: 2021

Japan's economy watchers index is a relatively up-to-date assessment of how the economy is doing based on a survey of, well, economy watchers! The indexes for November show a small improvement in the current index and a somewhat larger step back in the expectations reading. Both readings are still strong.

The queue standings of both the current index and the future index are extremely strong. The current index has a 99.2 percentile standing while the future index has a 90.8 percentile standing. Both indexes show that they have each been stronger than their current values less than 10% of the time since January 2002. The current index has only been stronger less than 1% of the time! That marks them as formidable readings.

Sequential strength: the current index The table looks at changes in the variables over three months, six months and 12 months – as well as at levels monthly. The highlighting feature flashes red when the annualized change on the horizon is weaker than in the previous period. Note that for the current index red values are absent over three months; there is only one over six months and one over 12 months. This tells us that the current index has been both expanding and accelerating broadly. Various sub-indexes that are not distinct categories but rather reflect diverse ways to group and understand the data, provide more detail. Both the headline and six of the nine sub-indexes display 90th percentile standings. In addition, three categories households, eating & drinking places, and services display the strongest values in their respective histories back to January 2002. Despite this, employment, an overall reading, has as an 86.2 percentile reading that is hardly weak; but it is the second lowest standing among current index components (housing is weaker at 54.8 percentile standing- much weaker).

The current index monthly patterns The current index has only three-monthly values that are not stronger than they were a month ago in October, these are retail, housing, and employment. In October, all components strengthened. And all components had strengthened in September as well. Despite the monthly climb in the headline, there may be some atrophy setting in.

The future index and monthly patterns The future index has all the same data presentations as the current index. Its month-to-month trends show a broad deceleration, however, with every category including the headline, weaker in November than in October. In October four categories had weakened relative to September while September had showed increases all around. Eating & drinking and services have slowed for two months running as have the readings for all corporations and for manufacturers.

Sequential growth: the future index While the future index shows signs of slowing in its monthly detail, that is not true for three three-month change readings. They are uniformly stronger than their (annualized) six-month change counterparts. However, over six months the future index experiences a broad slowdown with the six-month change slowing its pace compared to the 12-month change for all components except housing. Compared to its year-ago change, all metrics are higher since a year ago Japan's economy was not faring very well.

The future index components and sub-indexes also show a lot of strength with four indexes having 90th percentile standings. However, employment has a lower, 78th percentile standing. Housing, corporations, and manufacturers have standings in their respective 60th decile range and nonmanufactures slip into the 50th percentile range for their standing. These are also firm-to-solid-to-strong readings/standings; there is nothing weak here, but the future index readings are a cut or two below what we find in the current index.

The ZEW Survey shows weakening current conditions, slightly weaker expectations, and a sharp drop in inflation expectations as short- and long-term interest rate expectations rise and stock market expectations improve in the United States, Germany and across the EMU.

The economics situation has mid-range percentile standings with the U.S. and the euro area showing standings in the 60-percentile decile. Germany has a standing below its 50-percentile mark at 47.4%, placing it below its historic median. The situation eroded by 11.6 points on average this month for these three economic units.

Economic expectation surveys are offered for the U.S. and for Germany. They both register in the 50th decile, barely above their respective medians; the expectations readings drop by a small amount on average in December with underlying data showing Germany a bit lower and the U.S. just a tick stronger month-to-month.

Inflation expectations fell broadly in December. The average drop for the group is a decline of 19.7 diffusion index points. The standings for inflation expectations are in the low teens or lower. Inflation itself is still high in Germany, the EMU, and especially in the U.S. But inflation expectations that had jumped in February and March of this year have since cooled. After the jump high readings lingered around with net diffusion readings in the 70s for these three regions/countries for about six months, then they began to break lower in July or August. They continued to weaken and posted negative net values in November and deeper negative net diffusion readings in December. As of December, the net diffusion reading averages -34.6 compared to -14.9 in November. Inflation is broadly expected to have peaked and to be headed for lower values. These trends include the U.S. although the Fed has begun to sing a different tune of late and is prepared to accelerate the taper it only just started. Some Fed members want the taper completed earlier because they see a potential of higher rates ahead and the Fed wants all tapering to be over before it starts to hike rates. Europe and the U.S. seem to be in quite different places.

Both short- and long- term rate expectations moved up in December and for both horizons the average increase is a modest amount. But short-term rate expectations are modest with a 58.8 percentile standing in the EMU and a 64.8 percentile standing in the U.S. But for long-term expectations, both the U.S. and German rates have standings in their respective 80th percentiles. Despite inflation expectations breaking lower, markets are expecting short rates to firm to a modest degree and for long rates to remain firm at a relatively high level. Stock markets are expected to improve, too, and they have 60th to 70th percentile standings which are pretty firm considering that inflation is high and interest rates are expected to rise with long rates settling at a relatively high level.

German orders soured and declined in October. The revival stage of the Covid recovery seems to have drawn to a close and left nothing in its wake in the way of momentum.

Orders are falling at a 44.1% annual rate over three months; they are weaker than their 16% annual rate of decline over six months which in turn is weaker than their 1% drop over 12-months. Foreign orders follow that same script in terms of growth progressions with comparable magnitudes. Domestic orders also show the same sequential decay in orders. For domestic orders, the three-month pace of decline comes in at -35.9%, the six-month pace is -6.2%, but domestic orders show a small, 1.6%, increase over 12 months. It is still an eroding profile.

In the quarter-to-date, German orders are falling at a 42% annual rate with foreign orders imploding at a 53.6% annual rate and domestic orders contracting at a 19.4% annual rate.

Looking at where orders are in the post-Covid revival period, the results are grim. Taking January 2020 before Covid struck as a base, total orders are still lower on balance by 1.1%. foreign orders are lower by 4.5% and domestic orders are up by 4%. That's a period of 22-months and the best category is domestic orders that are up by 4% or an average gain of 0.2% per month for real orders.

The Covid question And now there is a new development with the Omicron variant beginning to take hold. The early (too-early-to-know) take on this strain is that it is more transmissible and apparently not as deadly as, so far, it has not sent many in South Africa to the hospital. But a number of young people have caught this virus and it is not clear why that is. So, we are flying blind about the impact of this virus feeling our way day-by-day as the ‘whole world' is bracing to try to find out what it will be.

Germany's Covid disaster Germany with a new incoming chancellor is taking a new more aggressive tact toward the existing virus as national and regional leaders have agreed to bar unvaccinated individuals from many activities in public life to force them to get vaccinated. Vaccination in Germany could be made mandatory as soon as February. Germany is experiencing a fourth wave of covid infection that is the most severe so far. And all of this is just about the existing virus and not about any risk from Omicron. Angela Merkel is taking a front role in this process backed up by the incoming chancellor, Olaf Scholz. The Berlin mayor has said that most of the cases of Covid are for unvaccinated people.

These are the restrictions being put in place by German officials to govern activities:

• Unvaccinated people will be limited to meetings with their own household and two other people
• The 2G rule (this refers to people recovered from Covid in the last two months or vaccinated people) will be enforced at restaurants and cultural venues and non-essential shops
• Clubs will shut in areas where 350 cases have been recorded per 100,000 people in the past seven days - the national rate is over 400
• Up to 30 million vaccinations will be carried out by Christmas - first, second or boosters
• Outdoor events, including Bundesliga football, will have limited crowds of 15,000 and 2G rules
• Fireworks on New Year's Eve will be banned (Source here).

Omicron perspective So far, 79 cases of the Omicron virus have been recorded in 15 European countries. Most are connected in some way with air-travel either directly or from contact with air-travelers from African countries.

German industrial activity Real sector sales in Germany show total manufacturing and mining sales falling at a progressively steeper pace from 12-months to six-months to three-months. Most sectors follow this pattern or at least come close without a major violation to the deteriorating sequential trend process. The exception is consumer goods where sales rise at a 5.6% pace over six months accelerating from a 0.9% gait over 12 months. Capital goods follow the script with sales easing faster over three months and with six-month and 12-month sales falling at the same pace. Intermediate goods show sales decaying from a 1.7% gain over 12 months to a -6.4% pace over six months. The three-month change is a ‘speed up' to -5.4% but still is a decline and a clear deceleration from 12-months and then again not much of a speed up compared to six-months. In short, only consumer goods show a real departure from the secular decay trend and, even so, all sectors and aggregates show real sector sales falling over three months. Only nondurables show a three-month drop pace smaller than its year-on-year pace. We can clearly conclude that German activity is mired in an ongoing and worsening pace of decline. The order data suggest strongly that the slowing is still in order and in train. Germany's Covid situation and its new ‘remedy' would seem to condemn the economy to a further period of continuing its tailspin.

The quarter-to-date (QTD) data for sector sales do show a bit more in terms of signs of life. The overall sales pictures for sales in manufacturing as a whole, sales of capital goods, and sales of intermediate goods all show incipient quarter-to-date sales increases. The QTD declines are all sequestered in the consumer goods sector- overall sales, sales of nondurable goods and sales of durable goods.

However, assessing sector sales vs. their January 2020 levels finds declines in every single sector and in all aggregate measures.

Germany and the EMU Big Four economy trends The bottom of the table features the EU industrial assessment from the EU Commission. On that metric, October finds France, Italy, and Spain stronger month-to-month with Germany weaker. Three-month averages of the EU data show ongoing industrial improvement for all countries on that sequence – a difference from the trends in German real orders and sector sales. However, in the EU data for all four countries, there is lessening improvement over three months compared to the early performances. France and Italy each improve over three months by just a tenth of a tick on their average comparisons. Germany is stronger than that on its three-monthly average gain but still slows compared to its large six-month improvement vs. its 12-month level. The queue standing data that compare each of the four countries' current metrics to their history of data back to 1990 find the best strength in Germany with a 98.9 percentile queue standing, followed by Spain at 97.9 percentile, Italy at its 94.7 percentile, and France at its 90.4 percentile. Comparisons of changes from January 2020 levels show the strongest gains are from Germany followed by Italy, Spain, and then France in that order.

French IP is up by only 0.1% over 12 months, a rather disappointing result. However, the graph shows that the PMI value for France has been extremely high. The PMI boomed as IP itself rose year-over-year by nearly 50%! But then as IP cooled and as year-on-year growth withered to a negative result, the manufacturing PMI gave back some ground but continued with readings above 50 showing ongoing expansion. In the last several months as year-on-year IP has floundered, the MFG PMI has strengthened. Maybe the message from the manufacturing PMI is that manufacturing is stirring again despite its year-on-year weakness.

That notion is corroborated by the sequential growth rates for manufacturing IP. The tiny 0.1% 12-month gain in growth gives way to a pace of 2.6% over six months and to a further step up to a pace of 3.4% over three months. The production process is still less than smooth as August IP rose by 1%, September IP fell by 1.6%, and October IP was up by 0.9%. But those are the relevant of economic data, with weather, Covid and supply issues combined with transportations problems all mixing-together to play a role in the output process.

In terms of driving the steady progression of output higher, the backbone of that effort is from capital goods where output falls by 1% over 12 months then advances at a 1.7% pace over six months then accelerates to a 3% pace over three months.

Intermediate goods show roughly steady growth with 12-month and three-month growth both at 1.4% with a weakening over six months.

Consumer goods shows the output of consumer durables working irregularly to higher growth rates with growth over 12 months of 4.1% then accelerating sharply over six months to 8.3% and settling to a lower growth rate of 5.8% over three months, a pace that is still higher than its 12-month pace. Consumer nondurable goods output is flat over 12 months; it rises to a pace of 5.6% over six months then slips and contracts at a 1.8% pace over three months.

One interesting trend is that even with the ongoing chip shortage, the output of automobiles in France has been steadily improving from a decline of 29.9% over 12 months to a decline at a 19% pace over six months to an advance at a 2.1% pace over three months.

The overall French trends are clear; but they are not fully supported by all the component sectors. And in the quarter-to-date, we see that unevenness at work again. Early in Q4 (October) aggregate output is rising by only a 1% annualized rate. Consumer durable goods output is up at a 3.1% annual rate, consumer nondurable goods are falling at a 2.7% annual rate while capital goods output continues to perform and expand at a 3.3% annual rate. Intermediate goods output continues to cruise along posting a 1.7% growth pace. However, in the new quarter, auto output is falling at a 29.1% annual rate. Now these are only quarter-to-date trends and since it is early in the quarter, they still can change a lot.

As always, the trends are subject to outside influence either from supply disruptions or Covid issues. The Omicron variant is the newest worry and thus far we know little about it. It’s a risk and that may mean a large one or a small one.