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

Belgium| Aug 22 2022
National Bank of Belgium Consumer Confidence Languishes
The National Bank of Belgium index for consumer confidence rose to -11 in August from -13 in July, returning to its June level. Three months ago, the index stood at -13. Six months ago, it stood at +1. Twelve months ago, it stood at +5. Despite the month-to-month improvement, the index has been on a weakening trend; it has weakened most sharply over three months. The index positions itself in the lower one-third a of its values since 1991 with a 32.1 percentile queue standing. This reading means that the index has been weaker than its current value about one-third of the time, marking this as among some of the weaker readings for Belgium since 1991, roughly the last 30 years.

The economic situation for the last twelve months made an improvement to -57 in August from -63 in July. This is a weak assessment. The August trailing assessment of -57 has a queue standing in its lower 7.6 percentile. The companion rating this month, for the next twelve months, looking ahead, has a reading at -32, which is a slight improvement from July's minus 37 rating. The 12-month ahead August reading is even (slightly) weaker in its historic queue than the evaluation of the past twelve months with a 5.8 percentile standing. Clearly the economic situation has been poor, and is expected to remain poor, despite the slight month-to-month improvement. This month's report earns the sound of one-hand clapping.

Price trends in the BNB survey over the previous 12 months more or less stabilized with a reading of 86 in August compared to 84 in both June and July. Over the next 12 months, some progress on inflation is expected with the index falling to 19 compared to 25 in July and 34 in June. Nonetheless, the broad progression of this index has been for deterioration with the 12-month-ago reading at 19, the six-month-ago reading at 33, and the three-month-ago reading at 41. Clearly, this shows a local trend of improvement that is resisting a broader trend of deterioration. The standing for price trends for the next 12 months is at its 52.6 percentile mark. This is an extremely sharp improvement from the 99.7 percentile standing that evaluates price trends over the last 12 months. The standing assessments show that inflation has progressed from some of the very weakest reading in the history of the survey to readings that are far more centrist near the middle of the distribution. That level of assessment might seem surprisingly high given the height of inflation in the EMU relative to target that prevails today. It may be colored partly by encouragement that the past extraordinary inflation environment is being put to rest.

The unemployment forecast shows some heightened risk of unemployment in the August index as it climbs to 16 from a level of 12 where it stood in both June and July. The unemployment forecast has had an uneven progression from twelve-months to six-months to three-months. Its current standing, at a value of 16, has a 34.7 percentile standing in its historic queue of data marking unemployment expectations is being close to the lower one-third of values in its queue of ordered data since 1991. Unemployment is more greatly feared, but the fear is not pronounced.

The major purchase index for the next 12 months has stabilized over three months at a reading of -20 in August. It had steadily eroded from twelve-months to six-months to three-months. Similarly, the present index has eroded and shows only a one-month improvement after a string of erosion.

The financial situation for the last 12 months stabilized at readings of -17 in each of the last three months. However, that represents a deterioration since 12 months ago the reading was -5, six months ago it was -11 and three months ago it was -13. The assessment of the last 12 months has deteriorated and then stabilized. It has stabilized at a level that is in the lower one percentile of its historic queue up data! The assessment of the past 12-months has been extremely poor for a household's financial situation. Over the next 12 months, the household financial situation garners a -8 reading in August compared to -7 in July and -8 in June. The broader progression shows that twelve months ago, the household assessment was at zero, six months ago it was at -5 and three months ago it was at -9. The current -8 rating has a 1.6 percentile standing, once again an extremely weak reading, among the weakest 2% of ratings by households of their financial situation looking ahead to the next twelve months since 1991.

Households rate their ability to save over the next twelve months more favorability this month; the favorability of saving currently improved slightly as well. Their respective standings, however, are moderate. The next twelve-month reading has a 63.9 percentile standing and the assessment of the current ability to save has a 52.2 percentile standing. These are mid-range assessments.
by:Robert Brusca
|in:Economy in Brief
Japan| Aug 19 2022
Japan's Inflation Shows Mixed Gains
Japan's inflation rose by 0.4% in July after slowing to a 0.1% gain in June. The category, all prices excluding fresh food saw prices grow by 0.5% compared to a 0.2% June gain. All items less food & energy rose by 0.2% after gaining 0.1% in June. Western economies would kill for these trends…

Across the eight major components listed in Japan's CPI, four of them show extremely weak (or no) gains month-to-month in July. Education, medical care, and miscellaneous goods show prices rising by 0.1% while housing showed no gain at all month-to-month. Food & beverage prices rose by 0.5% month-to-month. Clothing & personal items prices rose by 0.5% and transportation & communication prices rose by 0.4%, while reading & recreation prices surged by 0.7% but that followed a 0.6% June drop.

For the headline and for most components, in fact - for nearly all components, Japan shows no tendency- no clear trend - for inflation to either accelerate or decelerate. The one significant departure from this is for all items excluding food & energy where prices rise 0.3% over 12 months, at a 2.2% annual rate over six months and at a 2.4% annual rate over three months completing a clear sequential cycle of trend acceleration for the core CPI.

However, the headline and the headline excluding fresh food do not show any such pattern nor do any of the 8 major components of Japan's CPI. None of the 8 main components show either inflation clearly accelerating or decelerating. All of the components have a mixed pattern. Only when in the core, with food & energy stripped out, does this trend emerge. Over 12 months compared to the year ago, headline and core inflation both accelerate as does the total CPI excluding fresh food. And among the eight major categories inflation accelerates for food & beverages, medical care, and for transportation & communication. This is despite the fact that the inflation rates actually are negative for medical care and for transportation & communication but those prices fall at a slower pace over 12 months than they did one year ago, hence ‘acceleration.'

Six-month trends show acceleration for the headline to the core CPI and for the total CPI excluding fresh food. Food & beverage prices accelerate, housing costs accelerate, miscellaneous prices accelerate, reading & recreation prices accelerate, and transportation & communication prices also accelerate over six months compared to 12 months. Among the eight components of the CPI, five of them accelerate and three of them decelerate.

Three-month trends show a weakening of inflation compared to six-months for the headline CPI and for the headline excluding fresh foods. The core rate continues to accelerate. Among the eight detailed categories, prices accelerate in half and they decelerate in the other half. Prices accelerate for clothing & personal items, for education, for medical care, and for reading & recreation.

If we calculate acceleration in a truncated fashion, by skipping the six-month to one-year change and just comparing the three-month annualized change to the 12-month change, then Japan's inflation rate accelerates in the headline categories as well as in all 8 detailed product categories. I supposed we can conclude that inflation is lurking in Japan and rising with some degree of subtlety.

We see the strength in prices in the quarter-to-date developments. The current data are for July, so that's the first month of the third quarter. These calculations compute the annualized inflation rate by taking the July gain over the previous quarter's average and compounding that gain from the center of the quarter. On that basis, headline inflation runs at 3.2% early in Q3. The CPI excluding fresh foods runs at a 4.2% pace. The core rate rises at a 2.2% rate which is actually a pace slightly below its three-month pace. The quarter-to-date calculation across the eight detailed components of the CPI show price gains that generally are slightly weaker than the gains calculated over three months.
by:Robert Brusca
|in:Economy in Brief
Global| Aug 18 2022
Inflation Rages in EMU and Hovers Globally
Inflation in the European Monetary Union in July finalizes at 8.8% year-over-year. The gain for July is 0.7%, slightly softer than June's 0.8% and the same as May’s 0.7% rise, marking a strong run of price increases in the European Monetary Area.

Among the largest economies and the EMU, Spain's year-on-year inflation rate at 10.7% leads the parade, followed by Germany at 8.4%, Italy at 8.3%, and France at 6.8%. The United Kingdom, the second largest European economy but not a European Monetary Union member and no longer a European Union (EU) member, logs inflation at a 10.1% pace over 12 months. In all cases, the year-over-year inflation rate has accelerated at least slightly compared to the month before, and (of course), sharply form the year before.

While it seems inflation has been elevated for a long time, comparison with inflation rates a year ago remind us that that's an illusion. Twelve-months ago the pace in the European Monetary Union was excessive but stood at 2.4%. German inflation was excessive at 3.2%, Spanish inflation was excessive at 2.9%, but French inflation was within the target parameters at 1.5%, as was Italy's at 1.0%. Inflation in the euro area has been creeping up over the target for a while, but the aggressively excessive inflation is still a relatively new phenomenon.

Core vs. headline The results for core inflation underscore that core inflation rates are significantly below the headline. The overall European Monetary Union rate at 8.8% is more than double the pace of the core that is up by 4% year-over-year in July. Individual member rates are substantially below headline rates as well. Spain has the highest core rate at 6.2% (but that is still only about 60% of the headline pace in Spain). Spain’s strong core pace is followed by Germany’s, whose ex-energy rate is 4.4%, then by France where the core is up 4.3%, and in Italy with the core up by 4.2%. In comparison, the U.K. has a much hotter core inflation rate running at a 6.6% pace.

Acceleration The tendencies for inflation to accelerate breakdown a little bit this month. For headline inflation six-month inflation accelerates compared to 12-month inflation but then the three-month inflation rate steps down to a 9% pace from a 10.1% pace. Core inflation at 4% year-over-year dips to a 3.7% pace over six months and then jumps back to a 4.5% pace over three months accelerating vs. both its six-month pace and its 12-monht pace.

Acceleration by country Headline inflation among European Monetary Union members shows all members with accelerating inflation from 12-months to six-months. However, from six-months to three-months inflation accelerates in Italy and in Spain while it decelerates in Germany and in France. However, only in Germany among EMU members is the three-month pace of inflation below the 12-month pace of inflation.

Core inflation among EMU members shows acceleration everywhere from 12-months to six-months. From six-months to three-months, however, ex-energy inflation decelerates in Germany, while core inflation accelerates and all the other EMU members. Also, German core inflation is lower over three months than over 12 months but for all the other EMU members three-month inflation exceeds 12-month inflation.

Energy prices Oil and energy prices have been a clear driver of inflation in the European Monetary Union with Brent prices expressed in euros up by 64.1% over 12 months, up at an 85.9% annual rate over six months and now slowing as they are up at the 21.6% annual rate over three months. The monthly data shows sizable Brent price increases in May and June but in July prices broke falling by 7.3% month-to-month.
by:Robert Brusca
|in:Economy in Brief
Japan| Aug 17 2022
Japan's Imports Rise Strongly; Exports Grow But Lag Imports
Japan's trade deficit widened in July rising to ¥2.1 trillion from ¥1.95 trillion in June. Goods exports rose by 2.1% in July; goods imports rose by 3.5%. Imports continue to outpace exports over various horizons from 12-months and over shorter periods.

Growth rates show imports at an increase of 51% over 12 months, rising at a 59.9% annual rate over six months and at a 66.2% annual rate over three months. By comparison, exports are up at a 21.2% annual rate over 12 months, a 28% annual rate over six months and at a 40.4% annual rate over three months.

Imports are rising strongly on the back of rising energy prices but also on the back of a weakening yen that increases the import bill. Of course, that increase also includes energy prices because not only are the dollar prices for energy high but when translated into yen at the weaker yen exchange rate the cost of energy rises again.

Ironically, exports are doing better; the export growth rate is 21% over six months moving up to a 40% annual rate over three months. The weaker yen will provide a great opportunity to increase Japanese exports in nominal terms. When the yen weakens, against the dollar, it causes the dollar price of Japanese exports to fall and that should increase exports. At the same time, Japanese exporters can take some of that decline of the yen into a price increase and actually raise their yen prices while lowering their dollar prices and getting a double kick in export value. This, in fact, might be starting to happen but because import prices are so strong you still don't see it in the trade balance.

This is not unusual because of something known as the J-curve phenomenon. The J-curve phenomenon refers to the fact that when a currency changes its value the price effects go through first while the volume effects occur later. In this case when the yen gets weaker, import prices in Japan will go up quickly. In time, Japanese consumers may decide that goods are more expensive, and they may buy fewer of them. That will cause import volumes to recede blunting the impact on import value from the price rise. On the export side, the weaker yen should encourage foreigners to purchase more Japanese products, but that volume effect takes some time and in the meantime there is a bigger increase in import value than in export value that widens the trade deficit which gets worse before it gets better.

The table shows that over 12 months the yen is averaging ¥119.6 against the dollar, whereas over three months it's at ¥133.2. In July it has slipped further to ¥136.7. Over 12 months – point-to-point – the yen has fallen by 24% against the dollar whereas over three months it's falling at a 37% annual rate, a slightly faster pace. The broad yen index that figures the yen value against Japan's most important trade partners, broadly shows the yen is weaker over 12 months, at a -16.9% annual rate. Over three months it's falling at about the same pace, at a -17% annual rate.

The price data showed that export prices are rising by 19% over 12 months and at a 20% pace over three months. Import prices are up 47.9% over 12 months and at a 57.6% annual rate over three months. Import prices are really killing Japanese imports and the trade balance.
by:Robert Brusca
|in:Economy in Brief
Global| Aug 16 2022
ZEW Experts Still See Depressed Conditions and Harbor Weak Expectations
The overview table shows that the current situation in the eyes of the ZEW experts strengthened in August in the U.S. and the U.K. but weakened in Germany. Expectations for the U.S. firmed, but expectations for Germany weakened. Inflation expectations for the U.S. weakened, but they strengthened for Germany and the euro area. Short-rate expectations strengthened for both the euro area and for the U.S. Long-term rate expectations rose for both Germany and the U.S. ZEW experts, looking at currently weak stock market indices, saw them strengthening in the euro area, Germany, and the U.S. They look for the dollar to continue to strengthen versus the euro. That's the summary of the month-to-month changes in this month’s survey.

Economic conditions and expectations The ZEW experts see the economic situation as weak in the euro area, Germany, and the U.S. All these jurisdictions have economic situations that rank below their 40th percentile marking them as weaker than their respective medians (since the median occurs at the 50th percentile). Economic expectations for Germany are this week or weaker 1.4% of the time- very rarely. In the U.S., economic expectations are this weak or weaker less than 10% of the time- also rarely.
by:Robert Brusca
|in:Economy in Brief
Japan| Aug 15 2022
Japan's GDP Accelerates
Real GDP in Japan rose by 2.2% at an annual rate in the second quarter of 2022. This is a marked acceleration from the 0.1% rise in the first quarter of 2022 but slower than the 4% recovery pace in the fourth quarter of 2021 after GDP declined in the third quarter of 2021.

Quarter-to-quarter trends in real GDP components Private sector consumption was up at a sharp 4.6% in Q2 2022 while public consumption accelerated to a 2.2% annualized rate from 1.7% the quarter before.

Gross fixed investment posted positive growth gaining at a 3.4% annualized rate in Q2, the first quarterly increase since the second quarter of 2021.

Housing extends a string of quarterly declines as residential investment posted a -7.2% annual rate in Q2, an accelerated pace from a -5.6% rate in Q1 and -5.2% in Q4 2021.

Exports continue to show increases, rising at a 3.7% rate in the second quarter, up at about the same pace (3.6%) in the first quarter. Imports slowed with 2.7% pace after a 14.8% pace in the first quarter.

Year-over-year trends in real GDP Year-over-year trends show slight change in the pace of GDP as it grew by 1% over four quarters compared to 0.9% on that same basis in the first quarter. Private consumption has accelerated steadily from a year-over-year rate of 0.4% in the third quarter of 2021 to 1.3% pace in the fourth quarter of 2021 to 2.2% pace in the first quarter of this year and 3% over four quarters in the second quarter. By comparison, public consumption continues to be expansionary but growing only by 1.7% year-over-year and without any clear trend.

Gross capital formation continues to be under pressure showing a 3.5% drop over four quarters in Q2 2022 compared with a 3.9% drop logged in Q1. Capital spending shows declines over four quarters for each of the last four quarters with the last gain being a 1% rise in the second quarter of 2021. Spending on plant & equipment dropped in Q2 logging a 0.8% decline over four quarters; its last increase was a gain of 1.1% over 4 quarters in Q3 2021.

Domestic demand in Japan has grown by 1.2% over four quarters in Q2 2022 and had advanced by 1.4% over four quarters in the first quarter of the year. Both of those represent steps up from the previous two quarters; i.e., Q3 2021 and Q4 2021.

Japan indicators in 2022 Japan's economy continues to struggle. In June, retail sales fell by 1.1% month-to-month while rising by only 1.5% over 12 months. Employment in Japan rose by 0.2% in June and had gained only 0.3% over 12 months. Japan's leading economic index in June fell for the second month in a row; that indicator is down by 1.4% over 12 months. The year-over-year drop in the LEI sits in the 43rd percentile of its historic queue of data; evaluated on its level, instead of its growth rate, it has a 68-percentile standing. That's better but still not very good. However, one of the brighter notes on Japan's economy is its economy watchers index with the current index in June at a 91-percentile standing and looking solid.

The yen The yen and has been weakening, improving Japan competitiveness in international trade while raising costs to consumers for imported goods- especially energy. Yet, Japan's exports still appear to be engulfed in a protracted slowdown: they have slowed down from a 27.2% pace over four quarters in the second quarter of 2021, to 15.7% pace in the third quarter of that year, and to a 6% pace in the fourth quarter of that year. In the first quarter of 2022 exports grew by 4.6% over four quarters while in the second quarter they were up by only 2.5% over four quarters. Exports have not responded to the weakness in the yen at least not on a year-over-year basis.

Year-over-year trend in imports show some general slowing from an 11.4% gain over four quarters in the third quarter of 2021 to 5.6% gain in the fourth quarter that improved with 7.3% gain in the first quarter of 2022, but they have slipped back to 3.5% gain in the second quarter of 2022.
by:Robert Brusca
|in:Economy in Brief
Europe| Aug 12 2022
EMU Output Makes Solid Gain in June
The European Monetary Union (EMU) posted a 0.7% increase for industrial output in June, following a 2.1% increase in May. Industrial output is solid with a 2.6% growth rate over 12 months, 2.3% growth rate over six months and a 13.8% annualized rate of growth over three months. The tracking for manufacturing growth alone generally follows the same pattern with a 1% gain in June and 11.9% annualized rate over three months.

The June report completes data for the second quarter. In the second quarter, total output is up at a 4.5% annual rate; manufacturing output is up at a 2.3% annual rate. Output gains by sector are led by consumer durables at a 9.4% annualized rate. Consumer nondurables output rises at a 4.9% pace, capital goods output has come back strongly with a 5.6% annual rate increase, and intermediate goods output showed a decline at a 1.4% annualized rate.

All the sectors show increases in output compared to the pre COVID level of output in January 2020. Overall output is up 2.7% with manufacturing output up by 2.5% over that span. Consumer durables has the largest gain at 6.3% followed by consumer nondurables at 5.6%. The smallest gain is from the capital goods sector with a rise of 0.9%. Intermediate goods output is up by 2.2% over the span.

The manufacturing and industrial output performance numbers do not fit well with the manufacturing PMI as the manufacturing PMI show reduced activity in April, May, and June. In all three months manufacturing output progressed from the flat in April to up 1.8% in May and up 1.0% month-to-month in June. However, at a PMI diffusion value of 52, the manufacturing PMI gauge for the EMU does show expansion. But it doesn't show strength; it is showing persistent cooling.
by:Robert Brusca
|in:Economy in Brief
United Kingdom| Aug 11 2022
RICS Survey Points to More U.K. Housing Sector Weakness
The survey of housing market conditions in the U.K. continues to show strength in prices versus weakness in activity. Housing price expectations, however, were reduced on the month as new sales continued to post weaker results and sales prospects fell sharpy to a weak level. The residential survey from the Royal Institute of Chartered Surveyors (RICS) demonstrates the growing malaise and also the mixed set of conditions in the U.K. housing market.

To be sure, house prices continue to gain. But the pace of those gains is slowing as the diffusion index is down to 63 in July from 65 in June and 71 in May. Still, these surveyed values, which are net diffusion indexes, show that on balance there are more prices increasing than decreasing since the reading for July is over 50. Viewed as a percentile standing on data back to 1999, the current three-month trend for the price diffusion index has been higher only about 8% of the time. On this observation alone we might think some weakening is in order.

The clear take away from this survey about prices is that they're still moving up and the upward momentum is still significant. However, a second and perhaps more important take away from this is that the breath of the improvement in the index is shrinking. Recently in this cycle - as recent as April of this year, and February - the house price diffusion index had values as high as 78. Back in June and July of a year ago, the house price index had values of 80 in July and 83 in June.

These conditions have changed as house price expectations have withered; expectations for three-months ahead fell to a net reading of +1 in July from +2 in June and from +12 in May; over the last three months this metric averaged +5; over six months it averaged +16. Clearly house price expectations are diminishing and although the net readings are still positive that is an outlook for prices to rise that is now down to its thinnest possible margin of one-point. Viewing this reading of price expectations against historic data, price expectations have been stronger than this nearly 58% of the time. The metric for price expectations is now below its historic median. And remember this is a thinning and a narrow margin for expected price increases in an economy with severe rising inflation in other prices.

At the same time, new sales log the value of -13 in July which is a very slight improvement from the -14 reading in June. New sales had slipped to that level from -5 in May. The six-month average for new sales has been -4 while the 12-month average is -7. Actual sales have been logging net negative values for some time, but clearly the weakness has just ramped up and gotten more severe.

Expectations for three months ahead echo these changes but with a bit more emphasis. Sales expectations in July slipped to -20 from -11 in June and to minus-one in May. Their six-month average is at zero while their 12-month averages is at +7. Sales expectations have averaged positive numbers for 12 months and flat numbers over six months; this series this has transitioned into a relatively steep negative outlook with the July reading of -20. The July reading, in fact, has a standing in the lower 3.2 percentile of its historic queue of readings on sales expectations. Sales expectations are weaker than this only about 3% of the time. And this is not surprising because actual sales have slipped to a ranking below the 25th percentile so that they are weaker than their current level only about one-quarter of the time. Current and expected-future sales erosions are in sync
by:Robert Brusca
|in:Economy in Brief
Germany| Aug 10 2022
German Inflation Rises
The German inflation rate as measured by the HICP accelerated to 8.4% in July from 8.3% in June; this gain is still short of the peak pace of 8.8% in May. The core rate moved up sharply to log a 12-month gain of 4.6% from 4.2% a month ago; it is also short of its peak rise of 4.7%, also in May. Still, these are high rates of inflation and well above the target for all the European Monetary Area, a target of around 2% since the new objective for the ECB is an average of 2%.

The month-to-month change in the July HICP was a gain of 0.6%, a sharp turnaround from June’s 0.2% drop. The core rate also rose by 0.6% in July, also sharply higher than its 0.3% decline in June. Both the headline and the core measures had risen sharply in May with the headline up 1.1% month-to-month and the core up 0.8% month-to-month. What we learn by looking at the monthly values is not much. May saw a terrific spike, June gave us some relief from that spike, but now in July inflation is back running hot – even as energy prices cooled a bit.

The German domestic measure of inflation has tracked the same changes as the overall HICP. The headline rose by 0.5% in July after falling by 0.2% in June and currently shows a 7.6% increase year-over-year. The CPI excluding energy for the domestic inflation measure shows a 0.6% rise in July after falling by 0.3% in June; it is up by 4.4% year-over-year (a bit less than the core for the HICP measure).

Over the 11 categories in the table, inflation is accelerating in 59% of them in July. This is a sharp pickup in diffusion from June and May when inflation was accelerating and only 27% of the categories and 18%, respectively.

However, the sequential diffusion readings are much more worrisome. Over three months inflation diffusion is 63.6%, over six months it’s at 72.7%, and over 12 months it's 54.5%. The diffusion calculations represent the percentage of the categories with inflation rising and half of the categories with inflation unchanged; a value of 50% is neutral in terms of inflation acceleration and deceleration. Values higher than 50% indicate inflation is accelerating; values below 50% indicate a deceleration. Of course, the actual inflation figure for the month may not behave this way because the inflation statistics are weighted. The diffusion statistics are not weighted; they're just applied across categories.

Even though headline inflation is up sharply over 12 months at 8.4% compared to 3.2% a year ago, the diffusion calculation on that comparison is only at 54.5%, just a small measure above the 50% acceleration guideline. Setting aside the issue of the weighting the categories, one of the reasons that the diffusion indexes is low while inflation itself accelerates sharply over 12 months is that among the categories that see price increases the acceleration averages about five percentage points whereas among the categories where inflation decreases, the decelerations average only about two percentage points. But the diffusion calculation is about the number of categories that are moving not about magnitudes. So, with six categories accelerating and five decelerating, the accelerators win and we get a diffusion reading slightly above 50%. But in terms of the inflation number, we get a much higher inflation number than this diffusion calculation would suggest because where inflation is accelerating it's accelerating sharply and where inflation is decelerating it's decelerating at about half the pace of its acceleration. This, of course, is in addition to the differences in weighting across the categories. Diffusion is a useful metric we see it used in the PMI reports, for example. But it also has some limitations. One thing it is good for is assessing inflation’s breadth. As of July, over six months and three months, inflation is rising both strongly and broadly.

Oil prices were factor tending to move inflation lower in July. Brent oil prices expressed in euros had risen by 7.6% month-to-month in May and by 5.3% month-to-month in June, but in July those prices fell by 7.3%. Sequentially, Brent prices have slowed down as well. Brent rises at a 21.6% annual rate over three months, at an 85.9% annual rate over six months and at a 64.1% annual rate over 12 months. This compares to a rise of 66.9% year-over-year one year ago. The break in Brent prices should help to pave the way for milder inflation in the future if global oil prices continue to trade in this lower range or lower.

The bottom line for Germany is that inflation is still far too strong. The ECB is raising rates, but it is also worried about fragmentation in the euro area and the threat of an energy cut off from the Russian pipeline that would cripple most of Europe. Russia has reduced the oil flow already using what many regard as a bogus maintenance excuse. Inflation is clearly too high in the EMU; it continues to cook at a torrid pace in Germany and in Europe and yet the ECB finds its hand is stayed by concerns about how geopolitical and economic risks interact in the euro area. It's a tricky situation all around and inflation is still far too high.
by:Robert Brusca
|in:Economy in Brief
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