Introducing

Robert Brusca

Robert A. Brusca is Chief Economist of Fact and Opinion Economics, a consulting firm he founded in Manhattan. He has been an economist on Wall Street for over 25 years. He has visited central banking and large institutional clients in over 30 countries in his career as an economist. Mr. Brusca was a Divisional Research Chief at the Federal Reserve Bank of NY (Chief of the International Financial markets Division), a Fed Watcher at Irving Trust and Chief Economist at Nikko Securities International. He is widely quoted and appears in various media. Mr. Brusca holds an MA and Ph.D. in economics from Michigan State University and a BA in Economics from the University of Michigan. His research pursues his strong interests in non aligned policy economics as well as international economics. FAO Economics’ research targets investors to assist them in making better investment decisions in stocks, bonds and in a variety of international assets. The company does not manage money and has no conflicts in giving economic advice.

Publications by Robert Brusca

Germany| Jun 24 2024
Germany: IFO Confidence Weakens Further on Poor Expectations; Move to Recovery Is Reversed
Germany's IFO survey had been engaged in an ongoing improvement, but this month there's a clear step back from that improving trend. The all-sector climate index from the IFO registers a reading of -15.3 in June, weaker than May’s -11.4 reading. The current conditions reading is a net positive, but it is unchanged month-to-month. However, expectations show an index value of -13.4 in June, below the -10.7 logged in May. That is very disappointing.

Business expectations have been improving since January. This is the first backtracking in that improving stretch. The reading of -13.4 for June brings it back to a level that is stronger than the reading for March but weaker than the reading for April.

Climate The overall climate reading weakened month-to-month. It shows slippage in manufacturing, wholesaling, and retailing. There's an improvement in services to plus 4.2 in June from plus 1.8 in May and there is a more modest improvement in construction to -25 in June from -25.6 in May. However, there is also sharp deterioration from month-to-month, with manufacturing falling to -9.2 in June from -6.5 in May, wholesaling falling to -26.7 in June from -19.8 in May, and retailing falling to -19.5 in June from -13.3 in May. Despite the significant improvement in services, there is deterioration elsewhere that dominates the climate reading this month. The rank standing for overall climate this month stands in its 20th percentile at the cusp of the lower 1/5 of the historic rank of all its observations. The weakest reading is wholesaling with a 12.6 percentile standing. The strongest sector is construction with 37.9 percentile standing. After its rebound this month, services moved up to a 22.6 percentile standing from 19.6% a month ago. Still, all of these are weak readings and not even marginally weak readings- all are well below their historic median that occur at a ranking at the 50th percentile.

Current The current reading is unchanged month-to-month at a positive reading of plus 1.2. It derives its positive reading and strength from the services sector where the current reading moved up to 14.0 in June from 11.8 in May. Manufacturing improved month-to-month, moving to -6.1 from -6.6 in May. The construction sector moved down to -17.1 in June from -16 in May, retailing fell to -7.1 in June from -2.2 in May, while wholesaling fell to -25.2 from -18.2 in May. Current conditions overall are unchanged on two improving sectors and three deteriorating sectors. The current index ranks weaker than the climate index with a 15-percentile standing overall; however, current conditions show two sector readings with percentile rank standings above their 50th percentiles, putting them above their historic medians. Those sectors are construction with a 54.9 percentile standing and retailing with a 59.5 percentile standing. Manufacturing has a 27.6 percentile standing while both wholesaling and services have a 19.1 percentile standing.

Expectations The expectations readings are what sinks the IFO survey this month. The all-sector reading falls to -13.4 in June from -10.7 in May. There are month-to-month improvements in services, but they log -5.2 in June compared to -7.6 in May and in construction that logs a -32.7 reading in June, up from -34.7 in May. However, manufacturing drops sharply to -12.3 in June from -6.4 in May, wholesaling drops significantly to -28.3 in June from -21.5 in May and retailing falls to -31.1 in June from -23.8 in May. Rankings show the all-sector expectations index with a 14.5 percentile standing, construction has only an 8.5 percentile standing, and retailing an 8-percentile standing. These are the two weakest sectors in expectations, and this contrasts sharply to their performance in the current index where they are the two strongest readings and the only ones with readings above their historic medians. On Expectations, wholesaling has a 10.3 percentile standing, manufacturing, an 18-percentile standing, and services, an 18.7 percentile standing.
by:Robert Brusca
|in:Economy in Brief
Global| Jun 21 2024
PMI Services and Manufacturing Backtrack Broadly in June
The flash readings for June in the S&P Global PMI indexes show widespread weakness, but the U.S. dominates whatever month-to-month improvement there is, showing gains in the composite, manufacturing, and services month-to month. Among other June entries in the table, only the U.K. has a month-to-month gain and that's for its manufacturing sector.

This is a clear switch from May when only eight sectors showed weakness out of the 21 sector entries for these seven reporting units each reporting 3 sectors. April also showed strength with only 5 of 21 sectors showing weakness and three of those being in the U.S.

Broader trends Average data, which are calculated only on the hard data which means they're updated through May, show the three-month averages weaker than the six-month averages. Only three sectors weaken over three months; those are the service sectors for the U.S. and for Japan plus a weaker manufacturing sector in Germany. Over six months compared to 12 months, there are six weaker sectors. All three sectors in Australia are weaker; and in Japan, the composite and the manufacturing sectors are weaker; in the U.S., the services sector is weaker. However, over a year compared to the year previous, there are only 5 sectors that are stronger. The chart at the top gives you a sense of the roller coaster ride that the PMIs have been through for services and manufacturing in the European Monetary Area.

Trend shift? The manufacturing data in the chart has been on a plateau for about 5 months while the services sector in the monetary union has only just begun to turn lower in the past two months. The question is whether there is some sort of new trend in place and whether the upswing is over. It's too soon to know this, but it's not too soon to wonder about it.
by:Robert Brusca
|in:Economy in Brief
Germany| Jun 20 2024
Inflation’s Downturn in Germany Slows or Stops- Are We ‘There’ Yet?
What Are Central Bankers Thinking about Inflation?

The focus on inflation and its implication for central bank policy has become a very widespread sport, especially now that inflation rates have declined substantially from their peak and have come much closer to central banks targets (2% all around). Lower inflation rates have taken some of the ‘air out of the inflation ball’ and the call-to-arms to maintain high rates. But that ball is still in-play and inflation is still excessive in most places, Germany, the EMU, the United States, the United Kingdom…just to name a few.

However, with elections on the boil in the U.K. and on the horizon in the U.S., decisions to change interest rates begin to leave the economic spectrum and enter the twilight-zone of the political world, one of very different dimensions. Or maybe we’ve reached the outer-limits…hard to tell.

The Bank of England met today and did not change rates with a 7-2 vote. But we are told three members were ‘on the fence.’ Had they shifted to a rate cut mode the vote to approve a cut would have gone 5-4 in favor. We are now told if things go as planned, an August cut is possible (likely, according to some). Many headlines about the BOE decision today note that the BOE did not cut rates even though inflation has been falling. Well, the data show roughly 2.9% headline inflation in the U.K.; core measures coalesce around 4.4% to 3.9%. These all are above target, but the financial press is not mindful of that. This is the sort of reporting that we have become used to in the U.S. as well.

Is all policy now derivative...or based on derivatives? Apparently, we have crossed some barrier and no longer live in a world where inflation levels or actual price levels matter! But changes matter. We live in derivative land! Biden supporters tout the drop of the inflation rate as do BOE-bashers. They neglect to mention that the level of inflation is still over target, and the rate of decline in inflation’s pace has slowed… or worse. No one is interested in targets anymore. In the U.S., where inflation has made prices high, people say yes, prices are high, but inflation is much lower- as though I can buy goods for the inflation rate instead of at the price level. Sheese…

What I see in progress in the U.S., the U.K., and the EMU is that policy decisions are longing to be made and looking for the right argument to justify them. This is not what should happen-this is backwards. Economics first, policy result, second. But economics has been captured by politics and the emerging view that no one ever need suffer if policy is just fine tuned correctly, as that great economist Steven Tyler wrote…’Dream on.’

Germany’s PPI dilemma So, the German case here with the PPI looks at an indicator but not the one with most skin in the game (the CPI/HICP). This is the PPI, a more volatile less comprehensive index. But we include in the table German CPI trends (CPI and CPI ex-energy) and see that inflation is above 2% and stuck sequentially. In any event, the ECB makes monetary policy for the Monetary Union and Germany is only a portion of that. But as the Union’s largest economy, what happens in Germany matters. And since Germany is not Las Vegas, what happens in Germany does not necessarily stay in Germany. The CPI is ‘stuck,’ and the PPI is accelerating.

German PPI inflation is transiting (overall and ex-energy) to higher inflation rates from 12-months to 6-months to 3-months. Will that sequence spread?
by:Robert Brusca
|in:Economy in Brief
Global| Jun 18 2024
Zew Current Situation Remains Dour
The German research house Zew has updated its monthly poll of members which shows little change in current conditions, some small improvement in still very-weak expectations, perceptions that inflation is still well corralled, and the view that lower rates in the US are more likely, while less likely in the Euro-Area (but still very likely everywhere!).

Macro conditions and expectations Zew experts see no change in the current situation in the Euro-Area in June, a small step back for Germany and a step back in the US. Still, US conditions have a queue standing of 54.5%, above their historic median while the Euro-Area’s weaker standing is at its 41.2 percentile, Germany is still viewed as much weaker with a 15.9 percentile standing in its current conditions metric. Expectations reverse those queue standings as Europe improves expectations slightly in the month to a 69.3 percentile standing, well above its historic median. The US marks a 4.5-point improvement month-to-month but still logs a net negative assessment and sports a below-median queue standing in its 37.8 percentile.

Inflation and interest rates Inflation expectations remain deeply negative as inflation is broadly and intensely viewed as not a problem. The queue standings for the inflation readings range from a 7.4 percentile standing low in the US to a ‘high’ standing at 15.9% in Germany- the EMU reading is below the German reading. Not surprisingly, interest rate expectations are broadly negative across short- and long-term rates. Expectations for lower US short term rates rose this month while for EMU expectations were reduced. Still, we are splitting hairs here with 5-percentile and 6-percentile standings for each of them- both extremely low. Long-term rate expectations follow the same pattern, with lower US rates expected- not so for EMU. Both queue standings are exceptionally low at a three-percentile standing for EMU and at a 0.8 percentile standing for the US. We simply have rarely seen expectations so weak for long-term yield reduction in either the US or EMU.

Stock market expectations show below-median values for all three areas: EMU, Germany, and the US. The US queue standing evaluation is the highest at a still below-median 40-percentile standing while Germany and the Euro-Area had standings in their ‘teens.’

The current situation in EMU and Germany has remained depressed since Ukraine invasion. Europe and Germany came out of Covid with the same initial vigor as the US, but then both suffered relapses as the Russian war on Ukraine emerged. The US regather momentum to work higher from mid-2022 while Germany and EMU have been unable to mount a sustainable reaction. Inflation expectations have gradually ‘risen’ from deeply negative values and remain still very weak at large negative values. There have been no significant changes to interest rates or inflation expectations, just very slow-moving changes.

With central banks moving rates slowly no one seems to be expecting anything to change abruptly anytime soon. Perhaps if there is a sharp change in the works it will come from some unexpected geopolitical event, but even the shock attack on Israel by Hamas and the Israeli response have had minor impact on markets and on economic expectations...so far.
by:Robert Brusca
|in:Economy in Brief
Japan| Jun 17 2024
Japan’s Orders Mostly Pull Back in April
The new data today from Japan are for orders and these are presented at the bottom of this table. Total orders fell by 3.6% in April with core orders (those being the series excludes large projects such as ships and electric power plants) falling by 2.9% month-to-month. Foreign demand was the only category that rose on the month, it was up by 21.6% but that's following the only decline from March when foreign orders fell by 9.4%. Domestic demand fell by 15.1% in April.

The ranking of the levels of the indices for orders are relatively high with core orders being the weakest at 85.8 percentile standing the rest having standings above the 90th percentile. However, over time and with inflation orders should grow so it might be more meaningful to look at the growth rank and on that basis core orders have a 44.8 percentile standing the growth rate rank, below its median - the median for ranking statistics occurs at the 50th percentile. However, in terms of growth rankings total orders, foreign demand, and domestic demand, all have standings from the mid-70th to low-80th percentiles which are quite solid metrics.

Beyond Orders Other metrics in the table also assess the performance of Japan's economy in various ways. The first block in the table considers the economy watchers’ index. These diffusion indices are largely below scores of 50, indicating contraction for these survey items. In terms of rankings, the growth ranking for the economy watcher components are all quite weak - all below their 28th percentile in terms of levels- and these are more meaningful since these are diffusion indices. Eating and drinking and service sector indices have standings above their 50th percentile, but the rest are below the 50th percentile indicating performance for these sectors below their respective historic medians.

The Teikoku surveys also employ diffusion indices. They are slightly weaker in their diffusion values than the economy watchers’ numbers. The rankings of the Teikoku diffusion indices in terms of index levels are all over the map, with manufacturing extremely weak, at a 35-percentile standing, and services at the other extreme, strong with an 80.7 percentile standing. In terms of the growth rankings all of them are weak with construction as high as a 38-percentile standing but after that nothing as high as a 32nd percentile standing.

The METI tertiary index moved up in April to 101.9 from 100 in March. It has an index standing at its 85th percentile and growth standing at its 66th percentile, both above their medians. For industry we use the industrial production index which dips in April compared to March. It has an index rank that's low at 6.8% and a growth rank that's only at 12.8%. The weakness in industrial production reinforces the weak reading we see on manufacturing in the Teikoku survey.

Japan's leading economic index in April ticks down slightly to 111.6 from a 111.7; that index has a ranking on its level at its 59th percentile and a growth ranking at its 74th percentile both mildly firm entries.

Against the background of the surveys in the table, the orders responses in April show standing growth rates and order index levels that seem relatively stronger than some of the responses from the surveys in the table above. However, there's little indication according to any metric in the table there's much strength in Japan's economy, in the manufacturing sector, or across the service sector entries. The far-right hand column simply looks at changes in the various indices from January of 2020 when COVID struck. Recognizing that these are changes over a four-year period, they indicate a good deal of weakness across the Japanese economy. Against that background the orders data have better responses than the surveys.

Still, the bottom line for Japan is that the economy is struggling, and the Bank of Japan is still trying to feel its way with policy being somewhat hesitant to raise rates too much despite excess of inflation because it's unsure whether the inflation is going to stay; the BOJ is still being very mindful of the long period of deflation it hopes it has put behind it. The sharp weakness in the yen that has developed this year is simply another policy challenge for the Bank of Japan and so far, this yen weakness has not particularly ignited either domestic growth or domestic inflation. But it has contributed to the increase in the price of energy and that has created some consumer distress.
by:Robert Brusca
|in:Economy in Brief
Japan| Jun 14 2024
Japan’s IP Backs Down after March Surge
Industrial output in Japan foundered drooping by 1.2% in April, with manufacturing output declining by 0.9% on declines spanning consumer goods, intermediate goods, and investment goods. Mining and electric and gas output fell in the month as well. Declines spread across all of manufacturing and all the major industrial production sectors. The textile industry managed a month-to-month rise.

In recent months manufacturing output and overall industrial output have both been up and down by month. Sequentially, output may have broken out from a weak trend. Over 12 months output fell by 4%, over 6-months it fell at a 7.3% annual rate, but over 3-months overall output is up and 11.5% annual rate, a strong showing. Manufacturing output fell by 4.3% over 12-months, it fell at the 6.8% annual rate over 6-months and then surged at an 11.9% annual rate over 3-months. And while these patterns are encouraging, the impact on year-over-year growth has only been to stabilize output at around the -4% mark of contraction.

By sector, consumer goods output continues to be weak but has trend with some of its weakness back. Consumer goods output falls by 4% / 12 months falls at a stepped-up pace of 8.3% at an annual rate over six months but then reduces its decline to less than 1% than an annual rate over three months. Intermediate goods output falls 4.8% / 12 months and follows at a 10.2% annual rate over six months but then manages to log an increase at a 0.4% annual rate over three months - that marks more of a reversal of trend than it does signal much of A gain. Investment could output falls by 3.9% / 12 months improve slightly by falling at only a 2.4% annual rate over six months and then jumped to a 24.2% annual rate gain over three months, that's a clear sequence of improvement but with most of the improvement coming over three months.

Outside of manufacturing, mining output showed a similar pattern. Mining output fell by 4.4% over 12-months, fell by 6.8% at an annual rate over 6-months, and then logged a 9.1% rate increase over 3-months.

Electric and gas output logs increased over all horizons and showed steady improvement over the sequential periods, rising by 0.8% over 12-months, rising at a 1% annual rate over 6-months, and then at a much-stronger 8.6% annual rate over 3-months.

There's significant agreement across the manufacturing categories and other industrial categories that show that over 3-months something positive is stirring in Japan's economy; but, as yet it's not enough to dominate the existing declining 12-month trend.

In the quarter industrial output is increasing at a9.9% at an annual rate, manufacturing output increases an 11.2% annual rate. However, the manufacturing result is driven by investment goods that are rising at a 30% annual rate in the quarter while consumer goods output falls by 3.6% at an annual rate and intermediate goods output falls at a 0.8% annual rate.

Mining and electric and gas output both fall in the quarter to date, as well. But now the quarter is in a nascent phase with only one month of data in. Results for the quarter can still change quite markedly as there are still two-months-worth of data plus the potential for revision to reveal themselves. The quarter to date growth calculation involves taking the current month and calculating its trajectory over the first quarter average by compounding it; that tends to exaggerate its impact so early in the quarter. That will change significantly when the next several months of data are added in to complete the quarter.

Output overall as well as manufacturing and all its sectors show output levels are still below what they were in January of 2020 when COVID first struck the world economy. The short-falls are significant, indicating that after four years Japan's economy still has not recovered from that body blow. The only industry that has improved relative to January 2020 is electric and gas and that's only because there's always a steady need for the output from utilities. This report highlights the potential for recovery in Japan's economy. Most of the gain stems from a revival in March, April's contribution is that it wasn't weak enough to wipe out the March gain. Still, the year-over-year change in output remains negative. Quarter to date output is stepping into positive territory but on the on the strength of one sector. Japan's economy still has a long way to go to put itself back on two feet.
by:Robert Brusca
|in:Economy in Brief
USA| Jun 13 2024
EMU Area Industrial Output Falls in April, but Leaves Uptrend Intact
Industrial production in the European monetary area fell by 0.1% in April after climbing by 0.5% in March and 0.1% in February. For manufacturing the April fall was greater at -0.4% although March had posted a gain of 1% and February’s gain is 0.8%. Uptrends are still intact for the headline excluding production as well as for manufacturing.

Sequential growth rates for overall industrial production excluding construction show a decline at a 2.9% annual rate over 12-months, a gain of 0.2% at an annual rate over six-months and the three-month rise of 2.1% at an annual rate - a progression showing improvement for manufacturing. The manufacturing drop is also 2.9% over 12-months, the six-month rise is at a 1.2% pace and the three-month gain is at a 5.9% annual rate, an even stronger progression toward better growth.

In April Euro-Area manufacturing sectors showed increases month-to-month except for intermediate goods that logged that a decline of 0.4%. Consumer goods output rose by 0.3% led by nondurables and capital goods registered an increase in output of 0.7% month-to-month.

The growth rates for manufacturing sector show clear acceleration only in capital goods where output declined by 4.8% over 12-months, then deduced its decline to a 3.8% annual rate over six-months but then exploded to a 15.3% rate of increase over three-months. By comparison consumer goods output shows revival but not clear acceleration, gaining 0.4% over 12-months accelerating to a 4.4% pace over six-months but then slowing to a 3.5% annual rate over three-months. Consumer durables are a marginal candidate for acceleration as output falls at a 3.4% annual rate over 12-months and a similar 3.8% rate over six-months, but then shifts to a gain at a 3.8% annual rate over three months. Consumer nondurable goods show increases on all three horizons, but output gains slow over three-months compared to six-months. Intermediate goods output shows declines on all three horizons; the declines are gradually diminishing but not sequentially diminishing.

Quarter-to-date growth rates for industrial production show headline production rising at a 1.7% annual rate early in the second quarter compared with three-point 3% annual rate gain for manufacturing. Both consumer output and capital goods output are rising at double digit rates, consumer nondurable goods are advancing at 8.4% annual rate; only intermediate goods output is declining on the quarter-to-date, falling at a 2.8% annual rate.

Comparing output levels, the level of output on January 2020 shows overall output is still 1 1/2 percentage points below what it was over four years ago in January 2020. Manufacturing output is still lower by a little less than 1/2 of one percentage point. Durable goods output is lower by about two percentage points, while intermediate goods output is lower by about 7 percentage points. Capital goods output is slightly higher by about six-tenths of a percentage point; nondurable goods production is higher by 7.7 percentage points. Consumer goods overall show production higher by nearly seven percentage points. The consumer is king.

We rank the performance of industrial production by its year-over-year growth rates as well. On performance back to 2007 total output and manufacturing output rank around their 18th percentile, that's in the lower one-fifth of their historic queue of growth rates - a poor performance. Consumer goods output overall has a 42-percentile rank, consumer nondurables output is the strongest industrial category with a 48.8 percentile standing, close to its median, but just below the median reading at 50%. Intermediate goods rank at about their 34-percentile standing just above the lower 1/3 of their historic queue of results. Capital goods output during this period has been especially weak, having only a 13.2 percentile standing, when ranked against its historic year-over-year growth rates.

The chart above actually provides a good summary and description of what's happening. It shows that the various sector growth rates are still contracting, however, it shows progress being made by intermediate goods and consumer goods while it shows there's still erratic performance in the capital goods sector. The capital goods sector has been especially important to the German economy that continues to flounder. This report suggests that there is improvement in train and that Europe's industrial sector also remains irregular. Improvement is still in train. In the unfolding quarter it appears the growth is beginning to take hold.
by:Robert Brusca
|in:Economy in Brief
USA| Jun 12 2024
German Inflation Progress Stalls
Monthly German inflation has been volatile with the HICP headline logging -0.3% in March, surging by 0.8% in April, and gaining 0.2% in May. The HICP Core rose by 0.2% in March and by 0.3% in each month, April to May. The domestic CPI has been steadier monthly and better-behaved. Still, among the four measures, German inflation over three-months still runs too-hot at annual rates ranging from 2.8% to 3.6%.

Sequentially these four inflation paths for HICP Vs the CPI and for headlines Vs the cores show either inflation stuck at a pace too-high or at a pace too-high and still accelerating. The HICP headline rises by 2.8% over 12-months, steps up to 2.9% over 6-months, then steps back down to 2.8% over 3-months. This contrasts to the domestic CPI measure that runs cooler but shows acceleration gaining 2.4% over 12-month and six-months then steps up to 2.7% over three-months. Both core rates at least ‘tend-toward’ acceleration. The HICP core is at 3.3% over 12-month and rises to 3.8% over 6-months and 3-months. The Core domestic CPI gains 2.7% over 12-months steps down to 2.6% but then steps up to 2.8%, a three-month pace above the 12-month pace.

In addition to the sequential trends in the table described above, the chart shows a progression of year-over-year rates, 6-month rates and three-months rates. Viewed as time series all these profiles have stopped falling and each is up from its cycle low and at least ‘stuck’ if not accelerating.

The ECB, of course, targets EMU inflation not German inflation. But Germany is the largest EMU economy, and its results get the largest weight in the inflation index the ECB does target. Having German inflation this stuck, or accelerating is not good for EMU.

The details of German inflation data look better (these derive from the domestic CPI series). We see inflation is accelerating in fewer than 50% of the categories over each month February to March, March to April, and April to May. That is very good news. Over the broader sequential timeline, inflation accelerates compared to its year-ago pace in only 18% of the categories. Over six-months, however, a time horizon when the CPI did not accelerate compared to its 12-month pace, and the core actually weakened, the breadth of inflation rose sharply to 72.7%! It was accelerating in nearly three-quarters of the categories. But that broad acceleration did not impact the headline results much.

All that simply points out that inflation has many dimensions; its calculation will depend on the period one chooses to measure it, the index one uses to describe it, and that, in turn, will involve the application of a weighting scheme. When inflation is not broadly experienced across index components but is embedded in components with large weights it may hit the index harder than breadth would imply. For this reason, I like to look at inflation on several measures and across various horizons.

A perspective on German Inflation When we take this eclectic approach for German inflation we see some good news at the grass-roots level as accelerating inflation does not appear to be broadly experienced. However, it is intense enough in categories with large weights to keep the inflation metrics pressured. The good news is that the hint at inflation acceleration is weak. The diffusion data suggest underlying pressures may be more isolated rather than spreading and it may be that some of the lumpier categories shed trend tendencies more slowly. For the time being, the German inflation data are not good news and they do show inflation stuck too high.

A Global Phenomenon Not to be Dismissed Stuck inflation is also part of a global phenomenon, so I would be reluctant to dismiss ‘sticky inflation’ and to treat it as transitory phenomenon that will eventually behave itself. We have already seen that mistake made once. There seems to be a lot of wishful thinking by central bankers these days. A nice long period of inflation containment and success has immediately brought people to the conclusion that all the sweat, toil, and sacrifice taken to get inflation low in past years was perhaps, unnecessary. Many now seem to believe that inflation will behave all on its own. But there is little evidence of that. And with global conditions shifting and China no longer competing to export goods as aggressively (or being allowed to) and with the geopolitical shift going to the display and acquisition of global power, influence, and territory, the peace dividend is certainly spent. Government budgets are more likely to be too-fat than too-thin. This means monetary policy is going to have to go ‘back to work’ to provide a counter-weight instead of resting on its past laurels. And few seem to appreciate that.
by:Robert Brusca
|in:Economy in Brief
Europe| Jun 10 2024
Industrial Output Is Making Gains across EMU
Manufacturing in the European Monetary Union advanced by 0.4% in April based on the performance of the median performer among the eleven countries listed in the table. That was a step up from a 0.2% decline in March and compares to a 0.6% gain in February. We have in hand S&P PMI data for the European Monetary Union in April for comparison. Month-to-month, that PMI reading was lower, as March was lower than February, although February had seen a month-to-month gain. In February, March and April, the manufacturing PMIs for the euro area continued to be below 50, that indicates output is contracting in the lexicon of PMIs.

However, the industrial production index for manufacturing is a different kind of accounting for industrial performance. It doesn't have all the elements that a PMI report, which has production, balanced with prices, supplier delivery lags, employment, and more. The overall PMI is a blend of all those things. Industrial production is simply about output and unlike the PMI gauge which looks at the breadth of change across categories among a group of individual reporting companies, the industrial production figures tote up actual output and present the result as a magnitude of change. The PMI process and the industrial production process generally produce similar signals. The PMI approach has the advantage that it can bring us data that are more up to date since diffusion data are easy to report. The industrial production approach gives us a more precise idea of what's going on in terms of the magnitude of change in the sector. Formally the PMI gauge looks at the breadth of output increasing or declining; industrial production looks at the magnitude of the change in output.

Typically, we compare the PMI gauge to the year-over-year growth rate in IP; on that basis, there is a ‘disconnect’ this month since IP falls over 12 months and manufacturing PMI is below 50 in April.

However, it's also clear that there is some progress going on in manufacturing. The month-to-month changes in growth and acceleration show improvement. Growth acceleration occurs in 63% of the categories in April using industrial production; acceleration is 46% in March and occurs across 61.5% of EMU members in February. Over the last three months, output has tended to accelerate more than to decelerate. Sequential data show output falling over 12 months, rising at a 0.8% annual rate over six months – again, based on the median- and rising at a 4.9% annual rate over three months. That's an accelerating trend. Engaging acceleration by calculating the breadth of acceleration across members reported in the table, we have 70% accelerating over three months, 38.5% accelerating over six months, and 50% accelerating over 12 months. That's not a crystal-clear trend, but it's suggestive of a manufacturing sector that is regaining its footing.

Quarter-to-date data output looks at the growth across European Monetary Union members in April compared to their first quarter average. On that basis, there is a median increase of 3.6% at an annual rate in the works. Only four of the reporters in the table show quarter-to-date declines in progress among monetary union members.

Assessing the ratio of current industrial production to January 2020 before COVID struck, there are five of eleven members that are still below that pre COVID level, underscoring the sense in which this period of growth dating back to pre-COVID has been disappointing. We're looking at a four-year period. And we're comparing the level of industrial output over that span and finding that nearly half of the members have output that's lower than it was over four years ago; that's not reassuring. However, if we look at the shorter-term growth, the growth rank of year-over-year IP growth compared to what it's been on data back to 2007, the results show more promise. Portugal, Greece, and Spain each show growth rates that rank in the top ten-percent of what they posted over that period. France and Belgium show growth rates that rank above their respective, 50th percentiles in the 60th percentile range. This indicates that their growth rates are above their medians. However, for most of the monetary union members Austria, Germany, Finland, the Netherlands, Luxembourg, and Ireland, growth rankings are below the 50th percentile indicating growth below their medians during this span. And for most of these countries growth rate rankings are below their 25th percentile - that is, they lie in the lower quarter of all growth rates reported. This further emphasizes the weakness in growth. Although the union does show some pockets of strength and there seems to be some rebound in progress.
by:Robert Brusca
|in:Economy in Brief
Europe| Jun 07 2024
Monetary Policy Gets Complicated
Making monetary policy in a 20-country union was never going to be easy. And coming out of a global pandemic was not going to make it any easier. But the problems faced by the ECB, the Bank of England, the Federal Reserve and others have common roots linked to polices to deal with the Covid crisis, the impact of Covid on global output, trade, and supply chains, the war in Ukraine and the elevated rate of inflation that has left most major money center countries with inflation above their respective targets.

In this situation, central banks have been trying to find the sweet spot for policy. Central bankers have been missing their inflation targets for three years - consistently. And while the Covid crisis disrupted growth and elevated unemployment (some places much more than others). Unemployment rates have returned to their pre-Covid lows or better, and yet inflation is still above target. In the 1980s and 1990s, we know what central banks would have done but these central banks are not those central banks. The names are the same, but the policies have been shifted to reflect different policy priorities.

EMU The euro area is a good example of all this; inflation has been over target since 2021 and the unemployment rate in the euro area has never been lower. And yet, this week, the ECB moved to cut rates. It did this even has the ECB shifted its inflation outlook higher at the current meeting. It is hard to say what analysis underlies this policy choice. The stated goal was to support the economy; at its meeting Christine Lagarde did not at all sound like she was planning a series of rate reductions. But the fact of the rate cut cannot be reassuring to those looking for the ECB to be the torchbearer for European monetary policy austerity.

GDP growth in the euro area solidified in Q1 but the year-on-year pace is still quite weak. Among the 12-EMU members reporting in the table in Q1, only the Netherlands reported a quarter-to-quarter GDP decline. However, Austria, Finland, Germany, Ireland, Luxembourg, and the Netherlands (six countries) log year-on-year GDP declines in 2024-Q1. Six member countries showed GDP declines year-over-year in 2023-Q4; six also show GDP falling in 2023-Q3; five GDP drops are counted in 2023-Q2. There is no arguing with the notion that growth in EMU is weak. But is it- was it- threatened in a way that a single 25bp rate cut alleviated risk? Did an isolated rate cut have any role to play at all in macroeconomic policy? What was the ECB trying to tell us with that cut?

Ranking growth rates for the 12 countries in the table shows only Greece with a year-on-year growth rate above its median growth pace on data since 1997. Globally, growth is weak- the U.S. is a notable exception; and yet as the year began, the Fed in the U.S. was preparing for as many as 3 rate cuts this year! Something at central banks has shifted. But inflation risks seem to have shifted too and for the worse. China is no longer the low wage force it once was. The peace dividend is looking as if it has been spent. A rearmament cycle now seems more likely. Are central banks operating differently or have they gone soft? We are about to find out.
by:Robert Brusca
|in:Economy in Brief
Germany| Jun 06 2024
German Orders Slip and Are Revised Lower
German orders fell in April when an increase had been expected; the decline in March had been revised to be larger and as a result the picture of German manufacturing had become bleaker in April.

The run of data on German manufacturing for the month is quite negative with very little that could be regarded as a bright spot or a positive result. A close look at the graphic, however, shows that foreign real orders are on a gradual uptrend (for their y/y growth rate) and have poked up above 0 to post a positive growth rate over 12 months. There's even a positive growth rate over six months that's stronger, still. But then, over three months, all that goes away. German domestic order growth rates deteriorate and decelerate from -8.3% over 12 months to an annual rate decline of 9.6% over six month to an annualized drop of 10.4% over three months. The headline for orders shows declines, hovering at 1.2% to 1.3% at an annual rate over 12 months and six months and then plunging at a 7.7% annual rate over three months. The year-over-year growth rate is poor, the trend in the shorter growth rates is poor, and the historic comparison shows a year ago drop of 10.9%. German orders have been weak for quite some time and that picture is continuing to paint on the same palette with the same colors looking ahead.

Sector sales fell by 1% in April after declining by 0.3% in March and posting a 1% rise in February. For manufacturing, there's also a sequential deterioration, with a 1.1% gain in February, a 0.4% annualized drop in March and a 0.9% annual rate drop in April. Sequential growth rates, however, from 12-months to six-months to three-months show the pace of decline for real sector sales diminishing for the overall metric as well as for all manufacturing sales. That's a little bit of good news, but those statistics still show overall real sales falling at a 1.2% annual rate over three months and manufacturing sales falling at 0.8% at an annual rate over three months.

Industrial indicators from the EU Commission in April all post negative numbers. In April, the metrics weakened in Germany, France, and in Italy but they strengthened slightly in Spain, compared to their March result. Sequentially the negative German numbers get progressively weaker from 12-months to six-months to three-months. The figures for France get slightly better, improving from a -8.2 reading over 12 months to a -5.6 reading over three months. Italy’s results vacillate between -6.5 to -7. Spain’s readings progressively improve from -6.9 over 12 months to a six-month average of -6 to a three-month average of -4.9. For the industrial data, we calculated queue standings that rank the April values in their historic queue of numbers back to 1990. On that basis, the German figures are the weakest of all with the 12.5 percentile standing, Italy has a 26.9 percentile standing, France has a 39.9 percentile standing; only Spain has a standing above its historic median, but the queue value of 52.9% is barely above the threshold of 50 that identifies where its median is located.

Quarter-to-date readings show us where the April figures reside in growth terms relative to the first quarter average results. German total orders, foreign orders, and domestic orders all are declining with the larger decline coming out of domestic orders at -12.6% at an annual rate. Real sales are declining at a 5.2% annual rate, with manufacturing sales declining at a 4.8% annual rate.
by:Robert Brusca
|in:Economy in Brief
Global| Jun 05 2024
The Rising Tide of Composite PMIs – Is Still Mixed
Composite PMIs are back to showing more places indicating improvement month-to-month. Only 40% of these 25 reporters have PMI values that weakens month-to-month up from 56% weakening in April. But there is an overpowering tilt of reporters showing expansion compared to contraction with only 4 reporters out of 25 showing contraction (Composite PMI<50) in May, the same as in April; March, has 6 reporters below 50.

Over 12 months more show weakening compared to a year ago, as 70% of reporters have PMIs below 50. But over six months that count is reduced to 34.8%, and over three months only 30% show weakening jurisdictions.

Contraction has been slightly more common over three-, six-, and 12-month periods, with 6-showing contraction over three months, 9-showing contraction over six months and 11-showing contraction over 12-months.

The percentile standings that are a completely different animal- they show the ranking of the PMI gauge over the last four years (to May 2020) compared to past performance. The 50% mark in the queue standing reflects the median value for each jurisdiction over the last four years. Ten of 25 jurisdictions are below their median performance in May. There is still a lot of under-performance.

The composite PMIs this month come of the heels of the release of the service sector PMIs that have values above 50 for all reporting participants except Russia. However, not all countries report services and manufacturing separately. Among the ten who report separate service sectors, seven of them showed growth erosion in May compared to April. So monthly PMI improvements are laid at the feet of manufacturing sectors or countries that do provide separate service sector status.

Smaller developing countries are struggling the most. The summary data show slight but steady increase in the average PMI that stands at 52.8 in May – above its three-month average. The median weakens over six months then rebounds above its 12-month average over three months as well as in May. The BRIC-3 (BIC? -excluding Russia) has the highest PMI average in the table at 56.2 in May. The U.S., U.K. and EMU are at 53.3, above the all-average and all-median. So, it’s the smaller economies that bring the averages lower. In May, Zambia, Egypt, and Hong Kong have PMIs below 50. France also has a PMI reading below 50. Apart from these, PMI reading below 52 are found in May for Kenya, Ghana, Sweden, and Russia (Ireland uses the reading from April that is below 52). On the strong side, May readings over 54 are featured in the U.S. (54.5), Spain (56.6), India (60.5), Saudi Arabia (56.4), UAE (55.3), Singapore (54.2), and China (54.1).

In terms of relativity, the queue standings for the BRIC-3 are at 76.5%, the All-average is at 56.7%, the U.S., U.K. and EMU are at 55.8%, and the All-median is at 55.1%. All these groupings show PMI values above their four-year medians. For those countries not included in any of those groups, the average queue standing is 54.4% and the median queue standing for them is 48%, their queue standings average below medians when pooled.
by:Robert Brusca
|in:Economy in Brief