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

Global| Aug 09 2022
OECD LEIs Point to a Ramp Down in Growth - and Nothing More
The OECD metrics this month show a broad tendency for growth to slow down. In July, the overall OECD measure saw month-to-month declines of 0.2%. It also saw the seven-economies measure fall by 0.2%, the euro area metric fall by 0.2%, and the U.S. measure fall by 0.2%. However, the LEI reading for Japan is flat on the month, the same as it was in June.

Over three months, the LEI growth progression shows declines between 2.4% for the euro area and 2.1% for the OECD overall while Japan logs a number that is the strongest in this group at minus 0.2%. These are annualized growth rates over three months.

Over six months, the metrics range from annual growth is weakest in the euro area at minus 2.5% but for all the OECD the figure is as strong as minus 2%. Japan's reading comes out flat over six months.

Over 12 months, all these areas show growth in the LEIs that range from a low of 2.3% in Japan to a high of 3% in the euro area and in the U.S. So, what we see is a pattern a year ago where the OECD leading economic indicators were growing nicely and then six months pass and there is widespread weakness in the OECD area and over three months that weakness sustains itself.

The percentile standing of the OECD indexes in their level form for all the OECD areas we've just mentioned are in the lower 20th percentile of their respective ranges apart from Japan that has a 62nd percentile standing.
by:Robert Brusca
|in:Economy in Brief
Japan| Aug 08 2022
Japan's Economy Watchers Index and Outlook Fade
The chart for Japan's economy watchers index and components underlines the volatility in the underlying economy and in the outlook since the Covid virus struck. Looking at that chart before Covid, the moves in the current index and in the future index appear calm and trend-related compared to what we have been seeing since early-2020. Just the shortest bit of time and looking at this chart of these time series makes it quite clear that something very different happened and continues to be an operation. From June 2020 to July 2002, volatility in the current index rose by 90% compared to the earlier period from Jan 2014 to Jan 2020 before Covid.

Japan's current economy watchers index has dropped to 43.8 in July from 52.9 in June. The three-month changes is a decline of 6.6-points, the six-month change is a 5.9-point rise, while the 12-month change is a 4.2-point drop. The standing for the current index is at its 34.8 percentile, just outside of the lower 1/3 of its historic queue of values. This is a very low reading. Among the surveyed sectors, retailing with the standing in its 40.9 percentile is the relative strongest with the reading on the job market at its 39.7 percentile mark close behind. The weakest sector right now is eating and drinking indicating the lingering impact that Covid fears have had on Japan’s economy in addition to concerns about growth. The reading for eating and drinking establishments, fell from 62 in June to 30.8 in July.

Japan's economy watchers future index also is weak; it fell in July to 42.8 from 47.6 in June. That index has a 21.5 percentile standing, a standing near the boundary of the lower one fifth of its historic queue of data. The future index is down by 7.5 points over three months, up by 0.3 points over six months and lower by 4.5-points over 12 months.

The strongest reading in the future index is for employment at a 35.2 percentile standing, followed by a 34.4 percentile standing for eating and drinking places. This seems to underscore that the current ranking for eating and drinking places is so weak it is viewed as temporary so that a future rebound is expected. The weakest readings in the future index are for housing in its lower 10-percentile followed by services in its 13.4 percentile.

The economy watchers index is clearly emanating weak signals and signals that have weakened sharply over the last three months.

The July reading of the economy watchers survey both current conditions and for the future index underscore difficulties in the Japanese economy. However, because of the choppy nature of both the current and the future indexes, we can't be particularly sure that this is a reliable reading. These readings seem to chop up and down over very short periods; we will be open the possibility that there could be a rebound next month. That's not a forecast; it's just an interpretation of the time series and its recent behavior. If there is another weak reading in a month, that will start thinking that it's more of an authentic sign of weakening in the economy. For now, we simply can't be sure. However, in the context of the global environment, in the context of what's going on with Japan's main trading partners, and in the context of the heightened geopolitical risk, there's every reason to think that these weak readings for the current index and for the future index may in fact be real.
by:Robert Brusca
|in:Economy in Brief
Japan| Aug 05 2022
Japan's LEI Waffles and Slows
Japan's leading economic index in June slipped to 100.6 from a level of 101.2 in May. May, in turn, had slipped from a level of 102.9 in April.

The leading economic index, which is an index that tries to look at currently available economic data and assess what it means for future economic performance, declined at a 0.8% annual rate over three months, at a 4.4% annual rate over six months and at a 2.8% annual rate over 12 months. However, because of the timing of the pandemic, over a 24-month period, the index is up at a 21.5% annual rate.

Clearly Japan is solidly in the recovery from COVID; however, it's not continuing to make much headway anymore. The sequential annualized growth rates reported above and presented in the table paint a picture of continuous slowing ahead, although the trend for the slowdown does not have a steady profile. There is a significant decline over 12 months, which worsens over six months, and then shows less distress over three months. On balance, Japan's economy is waffling and continues to get weaker; it has weakened in each of the last two months. This, in part, is because of a tougher comparison with April; in April, the leading economic index moved up to 102.9 from a level of 100.8 in March marking its highest point since December. The LEI index was last higher than its April 2022 level last in July 2021.

When the leading economic index lurches like it has been doing, its signal is less useful to markets and to policymakers.

Consumer confidence The components of the leading economic index are available as of May. They lag by one month; however, there is a related topical economic statistic that also available through June: that is the reading on consumer confidence.

Consumer confidence rose in May compared to April rising to a level of 32.9 from a level of 32, but in June it was set back to 32.2. Consumer confidence has a net gain from April over three months it's falling at a 6% annual rate; falling at a 31.5% annual rate over six months; over 12 months it's falling at a 14.4% annual rate. Like the leading index, consumer confidence is declining over 12 months, the decline speeds up over six-months, then it slows down over three months. These two indexes that draw from diverse kinds of economic data but obviously are linked to the economy suggests that there has been some widespread slowdown that subsequently dissipated. This common pattern is not simply random variability.

LEI components On a lagged basis, the inputs for the Japanese leading economic index show consistent positive changes from the interest rate spread. Loan and deposit changes are also positive although they've slowed. Starts for dwellings have positive changes over six and 12 months but a small net decline over three months. Deliveries and stockpile show month-to-month changes that are positive indicating consistent economic pressures and desires to rebuild stocks. These signals are consistent with growth. However, these metrics, while positive, have slowed on horizons of 12-months, to six-months to three-months. Export growth continues to exceed import growth in the LEI framework and there's no clear trend in that pattern.
by:Robert Brusca
|in:Economy in Brief
United Kingdom| Aug 04 2022
RICS Survey Shows Weakening U.K. Housing Market
With the Bank of England hiking its key rate by 50 basis points and planning to squeeze its balance sheet, the U.K. housing market (the RICS survey covers England and Wales) has been reacting to the central bank's tightening; expectations for prices three-months ahead have lost a lot of momentum. The chart looks at house prices over the last three-months comparing them to expectations for the prices over next three-months. While current prices have begun to soften slightly, there's a much bigger impact on prices expected over the next three-months.

If we rank performance of the last three-months historically, it ranks in the top seven percentile of where prices have been over the last 23 years. And if we rank current house price expectations on that same timeline, they have a 44-percentile standing, below their median (the median stands at a 50-percentile ranking). And this, of course, is occurring in an environment where inflation is hot and is driving prices in the economy higher.

House prices are affected by inflation, but they're affected more immediately by interest rates when there are consequences for mortgage rates. When mortgage rates rise, house payments rise at every given price for housing. And in a market that may have gotten a little overripe with housing prices ramping up in a slightly inflationary environment, an acute vulnerability can develop. Houses can become overpriced or ‘fully priced’ such that increases in official rates can have an outsized impact on the market. Rising mortgage rates would take an already fully priced housing market and create a financing burden for new buyers, depressing prices and sales. And for existing homeowners (well, partial ‘owners’), who are paying their mortgages at variable rates, payments will go up as well.

The Bank of England’s 50 basis-point hike is the biggest hike since 1997. And it's occurring in an environment with a good deal of inflation and where the Bank of England thinks that inflation is going to escalate further before it's able to gain control of it because of past increases in energy prices. Currently the Bank of England looks for its consumer price inflation to peak at just over 13%. Previously had expected the peak to occur at 11%. This is the major reason for the Bank to have adopted the 50-basis point rate hike in August.

Sales expectations have been hit hard, too. Sales expectations had been at a net of +9 in the RICS survey back in April, but in June that figure sits at -9 and has a 9% queue standing which means that it has been weaker historically only 9% of the time over the last 23 years.

New sales are also weakening. But the series ‘new sales’ has been a peculiar series that was extremely strong in May 2021 but then by July had slipped into relatively deep negative readings and then made some recovery posting positive readings in February and March of 2022. However, since then, it has slipped to a reading of -4 in April, to -5 in May, and to -13 in June. The -13 reading has a 23-percentile standing in its queue of data back to 1999. That means that sales were weaker than this about one-quarter of the time historically. And this is only the impact on current sales; sales expectations, as we mentioned above, are still being reduced. We are going to see weaker readings in the months ahead.

The economy is under stress and there are some expectations of a recession. The GfK consumer confidence rating for the U.K. slipped to -41 in June from -40 in May. The reading had been at -38 in April. The 12-month average is -22. Clearly, this series has been slipping significantly in recent months. In June, it has fallen to its all-time low since 1999.
by:Robert Brusca
|in:Economy in Brief
Global| Aug 03 2022
Global Composite PMIs Slow
The S&P composite PMI indexes that combine the services and manufacturing sectors in July show conditions deteriorating month-to-month in all but six of the 22 entries in the table. Doing better on the month in terms of their composite PMI reading are Russia, the UAE, Singapore, Ghana, Egypt, and Nigeria. Large industrial economies are not on this list.

In July, six countries showed month-to-month improvement. In June, seven improved. In May, 12 of the 22 entries in the table showed improvement month-to-month. Clearly there has been a deterioration in the last two months.

Over three months, nine countries show improvement compared to their six-month averages. And over six months, 10 countries show improvement compared to their 12-month averages. Over 12 months, 13 show improvement compared to their year-ago 12-month average. These broader averages also show weakening in progress.

The queue standing statistic positions the current composite PMI readings in a queue of values over the last four and a half years. Expressed in this way, only 7 of the entries in the table have PMI queue standings above the value of 50% which marks their median for this period. The relatively strongest readings are in Singapore, with a 96-percentile standing, in Hong Kong with an 88.9 percentile standing, Brazil with an 88.9 percentile standing, as well as India with an 85.2 percentile standing. However, there are a number of countries with percentile standings in the lower 15-percentile of their queue of values or less. These weak entries include the United States, the European Monetary Union, Germany, Italy, Ghana, Egypt, and Kenya. This disparate group includes some quite small developing economies as well as very large well developed economic entities.

There is in this report both a sense of a relative weakening and absolute weakness. Looking at some of the PMI average values for the U.S., U.K., EMU and Japan, a composite average PMI unweighted average fell to 49.8 in July from 53.4 in May and compares to an average of 53.8 over 12 months. The BRIC group, excluding Russia, shows an improvement in July to 55.3 from 51.7 in May and compares to a 12-month average of 52.1. The average for the full sample of countries falls to 52.3 in July from 54.2 in May and compares to a reading of 53.8 over 12 months. The median falls to 52.2 in July from 54.6 in May and compares to a 12-month average value of 54.5. The average queue standing puts the group's unweighted average at 45.6% while the median standing is at 44.4%. Both of those metrics, of course, reside below 50% which means they're below their historic medians.

These are quite uneven results; the queue standings tell us that these are readings that are extremely weak relative to the historic (4½ year) standings. However, the averages constructed from the PMI diffusion readings show us diffusion metrics of around 52 which imply moderate growth still prevails across the group. Of course, as moderate growth goes, this is considerably weaker growth than what we've seen over the past four and a half years that's the message of the queue standings. A second group of standings based on high-low percentiles that take the current reading and expresses it as a percentile of the highest and lowest reading for the period shows an average percentile standing for the group of 77.9% which is quite a bit stronger. However, these high-low standings, while interesting, are achieved using only three entries the highest the lowest in the current standing while the queue percentile standings use every observation in the period.

The clear conclusion here is that conditions are weakening, and they've become weak by recent standards. There's a growing number of countries showing composite PMIs slowing: There are 17 of these in July, 16 in June, and 12 in May. However, for the 12-month average there are only three of them. In July, there are 7 that report PMIs below 50 indicating contraction; that compares to four in June and four for the 12-month average. These are cautionary statistics. They warn us that conditions are very uneven with some pronounced weakness; the seven observations below a diffusion value of 50 in July is worrisome because of the number and the group's membership: the United States, EMU, Germany, Italy, Ghana, Egypt, and Kenya.
by:Robert Brusca
|in:Economy in Brief
Global| Aug 02 2022
Unemployment Rates Put Covid Behind Them, But What Is in Front of Them Is Frightening
Unemployment rates in the European Monetary Union are stable in June; the overall rate is at 6.6%. Unemployment in the EMU has been at 6.6% for three months in a row; it fell to 6.6% in April from 6.7% in March; it had been at 6.8% in February; it stood at 6.9% in January.

The EMU unemployment rate has stabilized after falling in the economic recovery in the post-COVID period. But unemployment progress has slowed. Unemployment rates rose month-to-month in June in Finland, Portugal, Ireland, and the Netherlands. Month-to-month unemployment rates were unchanged in Belgium, France, and Luxembourg.

The pace of decline in the unemployment rates has slowed in recent months. The number of countries in the table with unemployment rates falling over three months has varied between 12 (all of them) and 10 from mid-2021 until May 2022. This month the number of countries with the unemployment rates falling over three months is down to 7. That is still the majority, but there's a clear fall off in the tendency for unemployment rates by country to fall.

Still, unemployment rates are not dramatically increasing either. There is some tendency for unemployment rates to rise, but it's too soon to call it a significant trend. In April there was one country that saw the unemployment rate rise; that was Belgium. In May there were month-to-month increases for unemployment in Austria, Belgium, Portugal, and the Netherlands. In June there were also four Finland, Ireland, Portugal, and the Netherlands.

These may or may not be isolated cases. But if we look at correlations among unemployment rates across this group of 12 EMU member countries, we find the country with the highest correlation among the countries in the table is the Netherlands where there is a correlation of 0.70. France ranks second with the correlation of 0.65. Belgium ranks third with the correlation of 0.64. Two of these countries are showing unemployment rate increases in May or June or both. If we calculate correlations on changes in unemployment rates for this same group of countries, the Netherlands ranks first, Spain ranks second, France ranks third, and Belgium ranks fourth. The point still holds; two countries where the unemployment rate is rising tend to be relatively important bellwethers for the EMU in terms of unemployment rates and their changes.

Just for the record, and for comparison, the three countries with the lowest correlations with fellow members are Germany, Luxembourg, and Ireland, in that order. While Germany is a very important economy in the euro area and the largest economy as well, it tends to go its own way. That is a problem in terms of making policy for the union, because Germany is often doing things differently from the rest of the monetary union but because Germany's economy is so large it will be dominating and pushing pooled statistics for EMU in a certain direction that may not be representative of the union as a whole - certainly not representative of the union as represented by individual countries.

Recovery is complete but... Based on the data in the table, it is reasonable to call the recovery from the COVID recession complete. Unemployment rates across all countries in the table are below their historic medians except for Greece whose employment rate is almost exactly on its median at a 50.9 percentile standing. Only Belgium has an unemployment rate above where it was just before COVID struck. Belgian's rate is higher by 0.3 percentage points. Irelands rate is equal to what it was before COVID struck. By comparison, the United States and Japan have unemployment rates that are just a tick or two higher than they were before COVID struck.
by:Robert Brusca
|in:Economy in Brief
Global| Aug 01 2022
Manufacturing PMIs Show Slippage in July
The manufacturing PMI gauges weakened broadly in July as there was improvement in only 16% of them in the table, a group consisting of 18 significant international manufacturing centers. This follows June where 22% of the categories improved month-to-month and May when 39% of the categories improved month-to-month. Monthly improvement is becoming less common.

Viewed over broader horizons, over three months 22% of the categories improved, over six months 22% of the categories also improved, and over 12 months, 28% of the categories improved. The three-month calculation compares three-month diffusion to the average over six months, the six-month comparison is to the average over 12 months while the 12-month comparison is to the average of 12-months ago.

The erosion is somewhat slow as over three months the median manufacturing PMI reading is 52.1 compared to a median of 52.9 over six months and of 53.2 over 12 months. On a monthly basis, the median the PMI for this group is at 50.6 in July, down from 52.1 in June, and 53.7 in May. The slippage is steady, but so far it is not severe

However, this ongoing weakness has taken a toll. The queue standings, that look at the current PMI readings by country ranked over the last four and a half years, show standings below the 50% mark (which denotes the median in each case) for all except 6 reporting countries. The median rank standing on this timeline is the 32nd percentile, which puts the median in the lower one-third of all medians in the last four and a half years. These are weak numbers. Still, we also can contrast the rank standings to the position of the current readings in their high low range for the same period. On that basis, there are only two observations, Germany and Taiwan, that are below the midpoints of their respective high-low ranges. The average percentage standing in the range is at its 65th percentile which is a moderately firm standing above the midpoint.

Looking at performance of the manufacturing sector for this group since COVID struck in January 2020, we find the average change in the manufacturing PMI on that timeline is 1.5 points. It tells us that essentially the PMIs are back to a slightly higher level than they occupied before COVID struck in January 2020.

Table 1
by:Robert Brusca
|in:Economy in Brief
Europe| Jul 29 2022
Inflation Trouble in Euro-land
Inflation in the euro area rose sharply again in July, bringing the year-over-year pace to 8.9% compared to a 12-month pace of 8.6% for June. Inflation is running at a pace that is multiples of the European Central Bank’s target of 2%. However, the ECB has finally started to raise rates and, as we showed in a previous research piece, there is a more pronounced inflation-damping impact in train from the slowdown in money supply growth in Europe, which may also be eventually having some impact on the inflation rate.

For now, inflation is still running out of control. In July, the headline inflation accelerated in Germany compared to the gain in June but decelerated in France, Italy, and Spain.

Over three months inflation is decelerating in Germany and in France; it's accelerating in Italy and in Spain. German inflation rises at an 8.4% annual rate over 12 months, at 9.2% pace over six months and falls back to 6.3% over three months. In France, the progression is from 6.8% over 12 months, up to 9.3% over six months and down to 8.4% over three months. Italy and Spain show acceleration across all horizons. In Italy, the 12-month gain of 8.3% moves up to an 11.3% pace over three months. In Spain, the 10.8 percent 12-month pace moves up to a 15.2% annual rate over three months.

In three of four cases, excepting Germany, the three-month inflation rate remains higher than the 12-month inflation rate. In Germany, the three-month rate has dropped to a 6.3% pace from 8.4% over 12 months, a potentially significant drop. In France, the 3-month-to-12-month acceleration is over one and a half percentage points. In Italy, it's three percentage points; in Spain, it's on the order of four and a half percentage points. Inflation for the whole of the European Monetary Union accelerates from 12-months to three-months with a three-month pace about one percentage point stronger than the 12-month pace.

Ex-energy/core trends In Germany, ex-energy inflation gains 4.4% over 12 months, accelerates to a 5.1% annual rate over six months then falls back to a 4% pace over three months The German ex-energy inflation pace, like the German headline pace, is weaker over three months than over 12 months. In Italy, core inflation steadily accelerates from 4.2% over 12 months to 5.6% over six months to 7.7% over three months. The core rate in Italy over three months is higher by about 3.5 percentage points than the 12-month pace – a bit more acceleration than for the headline.

Between June and July, the 12-month inflation rate also stepped up to 8.9% for all EMU from 8.6% in June. The country level inflation rates saw Germany’s rate rise to 8.4% from 8.3%; the French rate rose to 6.8% from 6.5%; the rate in Spain rose to 10.8% from 10% in June. However, in Italy, the inflation rate settled lower at 8.3% in July compared to a rise of 8.5% in June. Germany’s ex-energy inflation rate accelerated in July to 4.4% from 4% in June. The Italian core inflation rate was unchanged between June and July at a pace of 4.2%.

Energy prices for Brent expressed in terms of euros saw a 3.8% decline in July after rising 23.1% in June and by 9.6% in May. The acceleration pace from 12-months to six-months to three-months are still impressively large.

The ramp up in inflation has brought the HICP up to a stunningly high – previously unthinkable- level in July. However, the year-over-year rate has not been this high for that long. In January, it was as low as 5.1%; in July 2021, just a year ago, its pace was a barely excessive 2.2%. As an example, the five-year compounded inflation rate for the EMU is at 2.9%. For Germany, it's at 3%; for France, it's at 2.6%. In Italy, the five-year compounded rate is at 2.4% while in Spain it’s at 3.1%. Much of this is because of the volatile items in the report mainly food and energy, particularly energy. If we look at the five-year compounded German ex-energy rate it is still only at 2.1%. A year ago, inflation was still at a level that was consistent with the target rate set by the European Central Bank for the whole of the euro area. Italy's five-year compounded core inflation rate is at 1.3%, still below the pace targeted for all the euro area.
by:Robert Brusca
|in:Economy in Brief
Germany| Jul 28 2022
Confidence in Europe Crumbles
The table focuses on German consumer confidence from GfK, but it also includes the most up-to-date metrics for Italy, France, and the United Kingdom. For all these countries, consumer confidence is extremely low. In the case of the German GfK measure, for which there's an advance estimate for August, the value of -30.6 is the lowest in the history of this survey. For France, the consumer confidence index at 79.5 has been lower less than 1% of the time. In the U.K., that consumer confidence measure for July has been that weak or weaker less than 1/2 of one percent of the time. In Italy, consumer confidence has been weaker 18% of the time. All of these are extremely low values for consumer confidence.

As inflation has risen globally, consumer confidence has fallen. This has created some confusion about economic performance as there also is concern about economic slowing and the potential for recession. However, what we see shows clearly that economic performance can still be pretty good even if inflation performance is very bad; and yet consumer confidence can register a very low reading in such circumstances. Perhaps the best example of this is in the United States where the unemployment rate remains near 40-year lows and where consumer spending continues to plow ahead and yet with extremely high inflation the U.S. consumer sentiment index, as measured by the University of Michigan survey, is near its historic low. Despite these conditions of low and falling unemployment and advancing consumer spending, many in the U.S. think the economy is in recession. It's confusing…

It's not possible to look at a consumer confidence number and to really know why consumers are feeling as bad as they are. Even the surveys that give detailed readings on the consumer that may allow you to extract certain elements that are particularly bad, it's always hard to know exactly what it is that is nagging at consumer expectations the most and causing the loss of confidence.

In the German survey, there are three components that are available with a one-month lag. These components refer to the reading of -27.7 for July rather than the -30.6 reading for August. However, both are quite weak numbers, and the component values ought to be relevant for what's happening in August even though these are, formally, numbers from July.

In July, economic expectations in Germany fell to a reading of -18.2 from June's -11.7. The economic index has been lower than that reading less than 10% of the time, historically. Income expectations in July fell to a -45.7 reading from June's -33.5. The income expectation rating is the lowest on record. The propensity to buy slipped to a reading of -14.5 in July from -13.7 in June; at that level, the propensity to buy has been weaker historically about 18% of the time.
by:Robert Brusca
|in:Economy in Brief
Global| Jul 27 2022
The Global Risk Rises- and There Is No Way Around It
Money slows as credit grows… faster Money illusion is an economic term for the distortion that occurs when a significant difference develops between the money cost of an item and the economic burden of purchasing it. For example, I have joked that inflation has made me stronger because I did not used to be able to go to the store and so easily carry home $100 worth of groceries. The illusion in this example is that $100 worth of groceries is the same thing it used to be. Of course, I am not stronger. Inflation has not made me stronger. Inflation has made my load lighter by causing $100 to purchase less than it used to. Money illusion is meant to clarify the fallacy of thinking that your wages are really higher or that your income is higher because they have risen in dollar terms when inflation is growing faster than your wages or income are rising and when your purchasing power has fallen.

To clarify those points, I have created the table below that looks in the upper panel at nominal growth rates for money and credit and then directly below on the same frequencies creates growth rates for the inflation-adjusted (real) flows.

The nominal flows in the upper panel show that money supply is decelerating in the European Monetary Union; it grew at 7.7% over three years, at a 6.8% pace over two years, and at a 6.1% pace over 12 months, but over three months the annualized growth rate is now down to 4%. There is also a deceleration in the real balances on those same same timelines. Three-year real balance money supply growth in the EMU is 4% and over two years it's 1.5%, but over 12 months it's declining at a 2.3% annual rate, and over three months the money stock in real terms is falling at a 3.2% annual rate.

In both cases, money supply is decelerating. So in some sense, you could say that the signal is the same; however, since economists think that the absolute growth rate of money supply matters, there's a big difference between saying that money is growing at a 4% annual rate over three months or that the real money stock is declining at a 3.2% annual rate over three months.

Clearly the ECB policy has been tightening regarding money supply. Skipping past the credit columns for the moment, we see the same thing going on for money supply growth in the U.S. and in the UK, and to a lesser extent in Japan. The U.S. money stock decelerates from a huge 13.7% growth rate over three years to a decline at a 1.3% annual rate over three months. The U.S. real money stock grows at an 8.3% annual rate over three years but is now shrinking at an 11.1% annual rate over three months (yikes!). The U.K. shows money growth over three years at a 7.8% pace, decelerating to a 2.7% annual rate over three months. The U.K. real money stock grows at a 4.1% pace over three years and is now declining at a 10.2% annual rate over three months. Japan’s nominal money stock grows at a 5.5% pace over three years and slows to a 3.5% pace over three months. Over three years Japan’s real money stock rose at a 4.8% annual rate; over three months the real money stock in Japan is still growing but has slowed to a 0.7% annual rate. Japan had much lower inflation than elsewhere, as result its distortions and the unwinding of its distortions creates less distress.

These statistics make it clear that money supply has slowed, and that the real money stock is falling in most of the major money center countries. Looking at interest rates alone may hide the degree of tightening that we're seeing on the part of central banks. Of course, this judgment is always complicated because the money figures that are reported are called ‘money supply’ but they are, of course, the result of supply and demand interactions in the marketplace that occur as the central bank sets the short-term interest rate. So, for any given interest rate, if demand is shifting, that can cause a change in the money growth rate even as the central bank holds the nominal interest rate target steady. It's highly likely with the weakening economy in Europe that money demand is weakening and that the weakening that we see in the growth rates of the money stock reflect not just to squeezing by the central bank but also a pullback in money holding patterns on the part of the public.

The euro area offers an interesting presentation on what is going on with credit demand. Credit to residents in the European Monetary Union is up at a 3.9% annual rate over three years; that drifts down to 3.8% over two years but then ratchets up to a 5.4% annual rate over 12 months and further to 6.7% at an annual rate over three months. However, credit - deflated for the effects of inflation - shows three-year growth at a 0.3% pace falling to -1.3% pace over two years and falling to -3% over 12 months, then it ‘speeds up’ slightly to fall at a slightly slower -0.8% pace over three months. What we see here is that as nominal money supply has slowed, nominal credit growth has increased. This may be evidence that the tighter credit policies in the EMU are starting to work and that transactors have been forced into the credit market to borrow to meet their business and personal needs. While real money supply (demand?) is falling sharply in the EMU, real credit growth has also started to fall but is falling at a slower pace as nominal credit speeds up.

The same trends pertain to private credit in the EMU where the three-year growth rate for nominal credit is at a 4.2% pace; that accelerates to a 7.1% annual rate over three months against real credit balances that rise at a 0.6% rate over three years then drop to a -0.4% pace annualized over three months. The private sector in these credit statistics shows signs of being under stress and needing to increase credit use to stay afloat. I make this judgment rather than a judgment that the economy is speeding up and increasing its credit demands because the underlying economic statistics show there is economic slowing in place. When there is economic slowing, monetary tightening, and an increase in credit demand it is much more likely to be the product of distress.
by:Robert Brusca
|in:Economy in Brief
United Kingdom| Jul 26 2022
Distributive Trades Deteriorate in U.K.
The distributive trades survey for the United Kingdom shows broad weakness in July for the retail sector and broad weakness for volumes in the wholesale sector as well. The expectations readings for both portions of the survey show weak current standings as well as a weakening outlook.

Retailing The retail sector in July shows a -4 reading for sales compared to one-year ago; that is a slight improvement from -5 in June, but it deteriorates from -1 in May. Orders, compared to one year ago, log a -13 reading in July, down from -8 in June and 2 in May. Sales evaluated for the time of year perform better with a - 9 reading in July compared to a -19 reading in June and a reading of zero in May. The stock sales relationship shows an increase to 29 in July from 12 in June and 11 in May. The standings for these four metrics show sales compared to a year ago with a 24.6 percentile standing, orders compared to a year ago with a 20.8 percentile standing, sales for the time of year at a 38.7 percentile standing, and the stock sales relationship at a very high 95.4 percentile standing indicating potentially that inventories are becoming overbuilt.

Looking ahead at expectations for retail performance, in August expected sales compared to a year ago dive to a -14 reading from -2 in July. Orders log a much weaker -28 compared to a -10 in July. Sales for the time of year log a -6 reading which is a significant improvement from -25 in July while the stock sales ratio climbs to 25 from 12 in July. Ranking these standings, expected sales compared to a year ago have a weak 11.6 percentile standing, expected orders for a year ago have a weak 6.3 percentile standing, sales for the time of year have a better, but still quite weak, 37.2 percentile standing; the expected stock sales ratio is very strong with a 97.2 percentile standing. On balance, retailing and its outlook remain quite weak.

Wholesaling The distributive trade assessment for wholesaling shows sales compared to a year ago at -13 in July, weaker than June’s rating and a sharp reversal from 30 in May. Orders compared to a year ago are up to an 11 reading in July, higher than a reading of 1 in June but well short of a reading of 19 in May. Sales for the time of year fell to a reading of 9 in July compared to 20 in June and 41 in May. The stock-sales relationship in July is at 10 which is up from -8 in June and is even with 10 in May. The percentile standings for wholesale sales data are generally firmer than they are for retailing in June but for the most part still weak with sales compared to a year ago at a 15.8 percentile standing, orders compared to a year ago have a 53.2 percentile standing; that is above the historic median. Sales for the time of year have a 43-percentile standing while the stock sales relationship has a 38-percentile standing.

Looking at expectations for wholesaling in August, expected sales fall sharply to a - 18 reading from 9 in July and stronger values in June and May. Orders compared to a year ago fall to zero in August compared to 8 in July and much stronger values in June and May. Sales for the time of year fall to a -11 reading from 12 in July and much stronger readings in June and in May. The stock sales relationship logs a 10 reading in August which is up sharply from -6 in July and readings close to zero in June and May. There is clear and sharp deterioration compared to May and June.

Neither the retailing nor the wholesaling portions of the survey are very reassuring. The best standing in the series apart from the stock sales relationship comes from a marginally above median reading for wholesaling orders compared to a year ago. Everything else shows weakness compared to historic median standings. Given the situation for the economy and in Europe, this is not surprising.
by:Robert Brusca
|in:Economy in Brief
United Kingdom| Jul 25 2022
U.K. CBI Business Optimism Improves for Q3 (Still Weak)
Business optimism in the U.K. improved in the third quarter to a reading of -21 from a very low reading of -34 in the second quarter. Yet, the U.K. economy continues to be under a great deal of pressure and all the risk factors that had been in play remain in play from the Ukraine-Russia War to the ongoing COVID issues, to the central bank raising interest rates. But optimism is not as negative in the third quarter as it was in Q2. Its standing has improved to a lower 23 percentile level from a lower 9 percentile level previously. While there is considerable improvement month-to-month, it's still a very weak report.

Export optimism improved in the third quarter compared to the second quarter although expectations for capital expenditures for buildings remained at the same reading as in Q3; assessments of capital expenditures for equipment moved higher. Capital expenditure expectations for both categories are quite high with 85-percentile standings for buildings and with a 91-percentile standing for equipment.

The number employed over the last three months backtracked slightly in Q3 but still has a 94.5 percentile standing with the trend still and a 96-percentile standing although it also backed off in the third quarter. New orders from three months ago fell back to a +11 reading from +22 in the second quarter marking a 73-percentile standing, but the volume of orders expected three months ahead improved; that response has only a 57-percentile standing. Domestic orders versus expectations show a stronger standing for current orders compared to expectations; the same is true for foreign orders over the last three months versus expectations for three months ahead. Expectations for domestic and foreign orders each show sub-median readings for three months ahead.

The output metric fell back in the third quarter to a +6 reading from +19 to a standing at its 55th percentile; expectations for output for the period ahead also fell to a reading of +6 from +17 in the second quarter but that yields a low standing in its 39th percentile below its historic median.

Finished stocks record a little assessment change between quarters with the standing in the 90th percentile while the three-month-ahead assessment for stocks drops to a -10 reading from +1 to a below-median 42.5 percentile standing.

Next is series of readings on the cost of output: domestic orders and foreign orders show extremely high readings for both the current and the expected values over the past three months as well as for the next three months. All these metrics have high 90th percentile standings. Clearly inflation is expected to be engaged.

On balance, the quarterly CBI series shows an improvement in expectations although still a great deal of weakness and clear expectations that inflation is going to continue to be a factor in the period ahead.
by:Robert Brusca
|in:Economy in Brief