French INSEE Survey Scores Solid Marks with Mixed Momentum

France's INSEE industry climate reading spurted to 112.4 in January to start the New Year from 109.7 in December despite an assault across Europe by the Omicron virus and some sharp words for the unvaccinated from French President, Emmanuel Macron. The French service sector, however, stepped back to 104.8 in January from 107.4 in December, marking a two-month drop of more than 13 index points, a very sharp pull back. We know that the service sector is more vulnerable to viral outbreaks, so my working hypothesis is that the virus smacked the service sector hard, but the manufacturing sector is signaling that growth is still in the groove. We will, of course, monitor French data closely to see if this is confirmed in forthcoming data releases.

A quick assessment The too-quick conclusion is that the queue percentile standings in the manufacturing sector are and remain high and that points to economic health. For services, there is more irregularity, more of a problem. And since that is the job sector, those assessments are troubling and cannot be swept under the rug. The service sector climate standing is only at its 61st percentile – a solid, if moderate, reading as far as growth is concerned. The service outlook has a more fragile 56th percentile standing – much closer to the neutral reading of '50' that marks the median response. While the past sales trend scores as a 90th percentile standing, the outlook for the next three month's sales drops to a much more basic 52nd percentile standing – and again one that is closer to being just an average response. Employment over the last three months has a very strong 98th percentile standing while the three-month look-ahead is already over the brink, with a below-median 45.5 percentile standing. Expected employment is weaker than it was in February 2020 and is below its historic median value (and average), but it still signals growth. Let's look at these trends more closely.

The two-sector two-step Manufacturing and services can and so diverge. But the sharp increase in the industrial climate index juxtaposed to the two-month and 13-point set back in the service climate reading is surprising. This two-month change difference in the two sectors, a difference of 12.1 points and is the largest since a two-month change divergence of 14 points in November 2020. There were much larger divergences over two-months as Covid struck in April and May of 2020 – but for comparison back to 2001, no other divergence is greater making this the fourth largest sector change divergence in the last 21 years.

Our casual eyeballing of this divergence as 'unique' is upheld by the more detailed and longer-term timeseries inspection. And the only times when such divergence has been seen in the past has been in a severe Covid attack period. So, it is reasonable to think that the highly transmissible Omicron virus is responsible and to look for some turnaround when Omicron clears. At the same time, the sharp hit to the outlook aspects of the services survey tells us not to be so smug in making such an assessment. So, we will advance with a tentative hypothesis in mind not with a fixed and well-supported conclusion.

Selective weakness...biodiversity…varying fear tolerance However, in the services portion of the economy, only the outlook survey items are weaker than their values of 2/2020. And the outlook indexes also are the weakest in their rank standings, although the outlook for prices remains stuck near its ceiling value. Given our experience with Covid - and especially since Omicron has come around to sucker-punch us after we thought the industrialized countries (at least) were in pretty good shape with vaccine coverage - it would not be surprising for people to become less resilient in their responses about the future. No one expected anything like Omicron, so who knows what's next? Although Omicron is less impactful than earlier variants, many people have a fear of Covid that is simply out of line with the expected impact from it. I have had Omicron, as has my family and well – it was the like the flu and not a very bad flu for the most part. So why are so many so fearful of it? One reason is biodiversity. Human biology is idiosyncratic, and everyone has their own unique reaction to Covid so in some sense you just don't know what 'mild' will be for you. And for some people, 'mild' turn out to be a different four-letter word. So, Omicron despite itself continues to debilitate economies. Think of it as interacting with people who have different tolerances for risk. Some bear the risk and go on with their lives; others are all but paralyzed with fear of the worst.

The INSEE manufacturing survey is uniformly solid and strong. The one lagging feature is inventories with a weak queue standing and a level lower than it was in February 2020. That tells us that firms have not been able to satisfy existing demand and to build inventories back to desired levels. So, the weak inventory metric actually is a vote in favor of considering demand to be still strong and an admission of ongoing supply chain issues being constraints.

On balance, France's economy still faces challenges. The service sector participants seem quite wary about the future while manufacturing is still at 'full-speed ahead.' Over the next few months, there will have to be sector convergence. I look for it to occur on the side that favors growth.

Commentaries are the opinions of the author and do not reflect the views of Haver Analytics.