INSEE Business Indicator Falls; An Unremarkable Report But One That Urges Vigilance

The INSEE business indicator for French industry climate fell to 103.6 in August from 105.6 in July. The index had been at 107.9 in June and 106.3 in May. The decline in August brings it down to a significantly lower level compared to where it's been in recent months. The indicator has a 63.3 percentile standing in its historic queue data back to 2001. This is a moderate standing above the median which occurs at a ranking of 50.

Manufacturing production expectations post a -1.6 reading in August, an improvement from July's -5 reading and from the readings of June and May as well. The ranking on data back to 2001, however, is at the 51.8 percentile of its historic queue of data, marking it as barely above its historic median value – a more or less 'average' reading.

The recent trend for production has a 4.2 reading in August compared to much stronger readings in May, June and July. However, the percentile standing in August is only at a 40.5 percentile standing in its historic queue of data back to 2001. This marks the reading as substantially below its historic median.

The 'personal likely trend' for production is meant to get the survey participant to look at their own industry rather than at industry overall. Respondents to the survey expect their personal likely trend will improve in August to 13 from what were much weaker values over the previous three months. This improvement to 13 has a queue percentile standing at its 71.7 percentile which is a reasonably strong reading.

Orders & demand in August have slipped to a -10 reading in August from -4.7 in July, compared to stronger readings in June and May. At -10, orders & demand have a 70.4 queue percentile standing, a moderately firm reading. Foreign orders & demand also weakened in August, falling to -7.6 from a reading of -4.9 in July and stronger values in June and in May. The August queue standing is at its 70th percentile, like the standing for orders & demand overall.

August inventory levels are up to 16.6 in August from 9.3 on July and represent an elevated level compared to June and May as well. This is a high reading at the 94th percentile of its historic queue of data.

Price trends show their own likely price trend at 39.7 in August, up from 35.3 in July. However, this is a weaker reading than in June and in May by a substantial margin. However, the August reading still has a queue percentile standing in the 96.8 percentile: that is within the top 4% of all observations back to 2001. Firms clearly are raising their own prices.

Manufacturing prices overall are seeing weakening month-to-month as August has a 55.3 reading compared to July at 63.3 and even stronger levels in June and in May. The manufacturing price level has a 95.5 percentile standing, just slightly weaker than for own prices. These readings indicate continued price pressures for the period ahead.

Looking at these survey responses compared to what they were before COVID struck, in January 2020, we have the industry climate index higher by only one point. Manufacturing production expectations are higher by less than one point. The recent production trend is higher by 5.4 points while the personal likely trend is up by 4.2 points. Orders & demand as well as foreign orders & demand are both weaker by 0.2 points. Prices, however, are hugely stronger than they were before COVID struck. The price index for the own likely price trend is up by 37 points; the manufacturing level is up by 49 points. Clearly firms have experienced a lot of inflation since COVID struck and their perceptions of prices remain high as we've seen from the percentile standings.

INSEE has also released a services survey. It shows just slightly weaker conditions for climate in August at a 106.5 reading compared to 106.7 in July; however, both reflect weaker values than June which was at 107.7 and May whose reading was 109. The August reading for climate in the services sector has a 76.3 percentile standing; the ranking of the 12-month moving average of climate has a 98-percentile standing. This decline in ranking indicates that there has been significant slippage in the climate indicator.

The service sector outlook is dead flat at zero in August after posting a -1 reading in July. This reading has a 71.9 percentile standing. Sales trends observed over three months are unchanged from July and little changed over two months; the reading has a top five percentile standing. Expected sales over the next three months are up slightly to 7 from 6 and have a 72nd percentile standing. Sales prices over three months slip to 13 from 14 and have a top 1-percentile standing. Prices expected over three months ease to 10 from a reading of 12 one-month ago but continues to have a 98-percentile queue standing, in the top 2% of all historic readings back to 2001. However, when it comes to employment trends observed over three months the reading falls to 0 in August from 9 in July and has only a 37.5 percentile standing- a standing below its historic median. Employment expected over the next three months has a reading of +3 which is a slight pickup from July but a weaker reading than June and May. August has a 46.2 percentile standing - still below its historic median.

The services sector shows some higher rankings for its components than manufacturing and business in general. However, the slippage in its employment reading outlook is disturbing because the services sector is the main source for employment. If the employment readings in services are slipping more than any other reading, it cannot spell good things for the future of consumer incomes and spending. The INSEE data for the month are therefore unremarkable but they have the seeds of some things that are disturbing. This survey tells us to be wary and to continue to monitor incoming data for France where there may be some unexpected weakness in train.