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

United Kingdom| Aug 27 2024
U.K. Distributive Trades Flounder But with More Upbeat Expectations
The U.K. distributive trades report offers a bifurcated view of the U.K. distributive trades sector. To generalize, the retailing portion of the report is weak while the wholesaling portion, for the most part, is firm-to-strong. There is quite a contrast to the rank standings of the line items surveyed in retailing compared to wholesaling. The average ranking across the retailing items is at the 23.9 percentile while for the distributive trades the average is the 55.9 percentile. Distributive trades average a reading that is above the respective component medians (above 50%) while for retailing the standing is about half that for the distributive trades. That leaves it well below the components’ medians in retailing averaging a standing near the top of the lower quartile of its queue of data.

Retailing changes and trends Retailing is mixed quarter-to-quarter. Capital spending and the business situation have taken a sizeable step back in retailing. However, import assessments advanced and the selling price advanced, while employment only ticked higher. Expectations for the selling price fell very sharply quarter-to-quarter as expectations for employment ticked higher. Compared to four quarters ago, both the current and expected selling price are exceptionally lower. Imports and capital spending are lower; employment is somewhat weaker as well. There has been a strong pickup over four quarters in expected employment.

Wholesaling changes and trends While wholesaling has much stronger rank standings than retailing in terms of its changes and trends, it also has a good measure of slowing. Selling prices are substantially lower quarter-to-quarter and capital spending has pulled back as well. Employment has become a bit weaker. In contrast, imports are up strongly compared to Q2 and the business situation is unchanged. After weakening sharply quarter-to-quarter, expected selling prices are only slightly weaker. Employment shows a small improvement in expectations compared to one quarter ago. Compared to a quarter ago, the selling price and the expected selling price both are much weaker. Capital spending plans are substantially weaker than they were a year-ago. But the business situation over the next six months has improved smartly and employment conditions compared to a year ago are up strongly with expected employment conditions up even more strongly.

Retailing standings Imports and capital spending are especially weak with standings below their 10th percentiles. The business situation for the next six months has only a 12.7 percentile standing. Compared to one year ago, the selling price is higher with a 51-percentile standing (above its historic median, by a small amount). But employment compared to a year ago has only a 19.6 percentile standing. Looking ahead for the selling price and employment expectations are not much different in a relative since with nearly the same standing relative to historic data as what is generated by current conditions.

Wholesaling standings For wholesaling imports are strong with a 74.5 percentile standing. Capital spending is much more restrained with a 24.5 percentile standing. The business situation over the next six months has a 67.6 percentile standing- a top one-third response. However, selling prices compared to average gains are more restrained with a 25.5 percentile standing. That is relatively weak while wholesales employment has a 70.6 percentile standing compared to where it was a year ago. Expectations for the selling price in wholesaling are for a much stronger relative performance with a percentile standing at its 47th percentile near its historic media. Expected employment is outright strong with an 81.4 percentile standing.
by:Robert Brusca
|in:Economy in Brief
Germany| Aug 26 2024
German IFO Gauges Take a Further Tumble
Germany’s IFO survey for August saw persistent deterioration in its headline readings as well as most principal components compared to their July values. The all-sector climate reading in August fell to -21.5 from -19.7 in July. Under current conditions the all-sector reading fell from -1.5 in July to -3.0 in August. For expectations, the August value fell to -18.0 from -17.6 in July – a trifecta of deterioration.

Rankings take a spanking In addition to these month-to-month deterioration in the three main readings of the IFO index for climate, current conditions, and expectations, the ranking of each of these - of course – slipped. The rankings remain extremely low. For climate, the all-sector ranking fell to 9.5% from 12.9%. For current conditions, the all-sector ranking fell to 10.6% from 11.9%, a month ago. For expectations, the ranking fell to 13.1% from 24.0%, one month ago.

Sector readings are low and deteriorate Weakness is deep, broad, and pervasive All the major aggregate sector readings for the IFO in August lie below the 15th percentile which makes them all exceptionally weak. The interpretation is that they have all been this weak or weaker less than 15% of the time. Sectors get individual rankings in each of the functional survey areas. With five-sectors in each of the three-categories, there are 15 different rankings in the table apart from the overall rankings for the all-sector aggregates. Across these 15 rankings only one of them, for construction, under the current conditions section, has a standing above its 50th percentile. That reading puts its August value above its median value for the period back to late 1991. All the rest of the sectors are below their respective 50th percentiles (and below their respective medians). The second strongest ranking is a 35-percentile standing, again, for construction, and this time in the climate category. The weakness in Germany is deep, broad, and pervasive.

Sector step-backs In the climate section the average step-back for the monthly (up-minus-down) diffusion readings is a step-back of one point for August compared to July. In August only one of the current readings improved compared to July and that was for retailing where the August reading moved up to -23.1 from -25.4 in July. Under current conditions there's only one reading that improves month-to-month, and again that is retailing that improves to a reading of -15.8 from -16.3 in July. Under expectations, there are two readings that improve month-to-month, the reading for wholesaling in August moves up to -30.8, an improvement from -31.4 in July; the reading for retailing moves up to -30.2 from -34.1. Apart from these readings all sectors deteriorated in August compared to July in all three functional categories. In addition, all the August readings have net negative diffusion values except for the services sector under current conditions where the August reading is at +12.3 which is a decline from +13.4 in July. And, even at that, the services reading has a 16-percentile standing under current conditions.

Graphic weakness... The chart also shows what the deterioration has been like across sectors though time in the IFO survey. The low point in this survey (apart from the recent Covid spike low) for many of the components came in late 2023 early 2024. Since then, there has been a minor rebound in play. However, over the last few months that has been unwinding and there's been another miniature down cycle developing.

The IFO reading and the global eco-picture The state of the world economy remains in flux and, of course, the German economy that is plugged into the international economy and depends greatly on manufacturing and significantly on international trade, continues to be under a great deal of pressure. Central banks around the world have either entered or are preparing to enter the twilight-zone of easing cycles with the exception of the Bank of Japan where inflation had been more consistently low, and where the central bank is now trying to reestablish interest rate normalization; it recently conducted its second-interest rate hike within the last month. The ECB kicked off the easing cycle early but has not followed up with a second reduction in rates. The Bank of England recently executed a more controversial rate reduction that was followed up by comments from their chief economist warning that the next rate cut may not come for some time. Just this past weekend, in Jackson Hole Wyoming, the Federal Reserve had a conference and heard its Chairman, Jay Powell, declare the time had come for the Fed to begin to embark on an easing process and to join the easing moves that have been engaged by in by central banks overseas. However, the timing and magnitude of the Fed’s move remains speculative.

Inflation – as always- holds the key The key point in all of these is that inflation which had accelerated during COVID and in the wake of the Russian invasion of Ukraine, since has slowed. But, in several places, that decline in inflation has either slowed dramatically or inflation appears to have become stuck at a pace above the target that central banks have established for inflation, which for all of them is at 2%. That reality creates a problem in terms of the outlook for markets that had been looking for a program of continued cuts as central banks to followed through on their rate reductions. But central banks have been looking for inflation to continue to fall. Inflation’s stubbornness has brought to a halt to the global cycle of rate cuts. That might be one of the factors explaining why improvements in the German IFO survey are also in the process of backtracking. The outlook is still mixed. Most still see central bankers cutting rates ahead. Yet, most rate cut profiles had been cut back, as inflation reduction stalled. But now expectations for rate cuts may step up again with the new outlook from the Federal Reserve in the US.
by:Robert Brusca
|in:Economy in Brief
Europe| Aug 16 2024
EMU Trade Surplus Expands
The surplus on the international trade account of the European Monetary Union rose to 17.5 billion euros after logging €12.4 billion in May. The July reading keeps the surplus roughly in the range that we've seen this year with the three-month average at €16.1 billion, a six-month average at €18.1 billion and a 12-month average at €14.4 billion. The improvement month-to-month stems from a week May.

Better surplus; worse news All improvements in the trade surplus are generally regarded as good events because they contribute positively to GDP growth; an improved surplus may indicate ongoing competitiveness for the reporting country or unit. But reality is always more complicated than that. Exports in the monetary union fell by .2% in June after falling by 2.8% in May. Imports in the Monetary Union are down by 2.4% in June after falling by 0.4% in May. The European Monetary Union is shrinking itself to a larger surplus and that certainly tempers the good news. The improvement in the surplus is coming about more because of weakness in imports than strength in exports.

Strength through nonmanufacturing? Beyond that, we can also break the balance down into a surplus on the manufacturing trade account versus a deficit on the non-manufacturing account. zin June the manufacturing surplus rose to €39 billion from €38.8 billion in May, a small improvement the manufacturing balance when compared favorably to earlier periods in the year. The balance on non-manufacturing trade came in at a deficit of €21.5 billion compared to €26.3 billion in May. It’s the deficit on non-manufacturing trade that fell and contributed the most to the improvement in the overall trade balance. The non-manufacturing average monthly balance is slightly smaller than it had been earlier in the year.

Weak imports may reflect weak growth Weak imports raised the question of the adequacy of domestic growth and, of course, weakening imports for non-manufacturing products (in the last two months) looks more to the future since these are the raw material for goods and future periods. For these reasons the improvement in the trade surplus in June may not be the good news that it seems to be in its headline.

There's also a good deal of volatility to deal with in these numbers looking at exports manufacturing exports fell by -1.5% in June and by -1.2% in May and they have for the most part negative growth rates over 12-months and 3-months with a small positive growth rate over 6-months. Non-manufacturing shows a sharp increase in exports in June, up 6.4%, but that's in the wake of a 10% month-to-month decline in May. Non-manufacturing exports have been steadily increasing and holding to relatively strong growth parameters rising 11%, over 12-months, at a 4.8% pace over 6-months, and at a 9.2% annual rate over 3-months.

On the import side imports are falling over all horizons by relatively consistent numbers ranging from a -4.8% decline year over year to a -1.6% annual rate decline over 6-months. The recent 3-months produce a decline of 3.6% at an annual rate for total imports. Manufacturing imports into the Monetary Union show negative growth on all horizons and there's no sign of that letting up. For non-manufacturing goods the trends go the other way and there's actually acceleration; non-manufactured imports fall by 1.4% over 12-months, rise at a 4.9% annual rate over 6-months and then rise at an 8.1% annual rate over 3-months. Of course, that pattern squares so much better with the pattern of non-manufactured exports, leading to suspicions this is mostly a price effect and not a volume effect.

Germany and France and beyond Looking at countries in the Monetary Union we highlight Germany and France and find that both in June have declines in exports and in imports with relatively larger declines in June imports. Both are coming off a May where exports and imports increased and where exports were stronger than imports. Sequentially Germany shows negative growth for exports and imports on all horizons with relatively deeper declines in imports. France shows consistently rising exports - even accelerating exports- while imports decline consistently over 12-months, 6-months, and 3-months.

Separately the UK reports declines in exports and imports in both June and May and its progression from 12-months to 6-months to 3-months shows sharp export and import declines over 12-months and over 6-months followed by strong exports over 3-months and essentially flat imports over 3- months.

Elsewhere in the monetary union we look at exports and find unclear trends… Finland, Portugal, and Belgium essentially seem to go their own ways with Belgium showing consistently weak and declining exports. Finland shows a tendency toward weakness interrupted by a strong 40% annual rate rise in exports over the last three months! Portugal also shows steady but slow export growth until the recent three months where there's an increase of 11% at an annual rate.

Summing up These trends for the Monetary Union portray inconsistency more than some kind of new trend developing. However, this occurred tendency to witness on the import side with the exception of non-manufactured goods whose trend is a bit of an enigma. Separate trends from both Germany and France show weak imports. Macroeconomic data have generally been moderate to weak in EMU. It's reasonable, after looking at these statistics to begin to question growth even though this is a report that generates a stronger trade surplus that tends to contribute positively to GDP growth! When growth is being boosted in the face of declining exports by even weaker imports, it's not generally a good sign. This is simply one of the automatic stabilizers in the economy that tends to soften the blow on GDP when the economy weakens. It's too soon to tell whether this is going to develop into some broader weakness or not. But Europe has been on a bit of the razor's edge recently and while the ECB did turn the corner and start to raise rates it did that once and there's been a long hold ever since. The outlook remains unclear both for growth and for monetary policy while the geopolitical environment has continued to deteriorate and the war on Europe's doorstep is as contentious as ever. If there is some clear good news for Europe, it's that perhaps the US July employment report appears to have been misstated and the data have that have been released in the wake of that report had been considerably stronger. This gives Europe some hope for sustaining an important source of export demand for their products. However, growth in the US is not certain either and there are question marks raised about its sustainability as the Federal Reserve grapples with the question of whether to cut rates in September or not. For the US, as well as in Europe - and we can include Japan in this as well, all bets on the future are off and data dependency has stepped to the fore.
by:Robert Brusca
|in:Economy in Brief
Japan| Aug 15 2024
Japan's GDP: Weak Q1 Stimulates Solid Q2; But Don’t Be Fooled, GDP Is Not Strong
The chart adequately depicts the economic condition in Japan. Japan’s quarterly GDP jumped to a gain of 3.1% in Q2 2024, but that was from the Q1 decline rate of -2.3%. Together there is marginal growth in the first half of the year.

Japan’s year-on-year growth rate shows the impact of these quarterly gyrations as the 3.1% annualized Q1 gain was not enough to boost year-on-year GDP growth to positive territory. Japan’s GDP continues on a declining year-over-year path.

Growth trends Japan’s quarter GDP series became exceptionally bumpy in and nearly trendless from 2021 on in the wake of the Covid disruption. GDP growth was positive with quarterly growth rates spiking as high as 4% and 5% but after Q1 2003 quarterly growth lost its zest; two of the past five quarterly growth rates have been negative. One has been about one quarter of one percentage point, with two other quarters in the 2.5% to 3% growth range. This pattern has produced a decaying year-on-year GDP growth rate pattern.

Quarterly growth Japan’s second quarter of 2004 produced a sharp reversal of weak private spending that fell 2.2% (annualized) in Q1 then rebounded at a 4% annual rate in Q2. However, there also has been four straight quarters of real private spending declines through Q1 2024. Public spending stepped back to gain just 0.3% annualized in Q2 after growing by 1.1% in Q1.

Spending on capital formation has been erratic. It fell at a 3.5% pace in Q1 then surged back at a 6.9% growth rate in Q2. However, recently in Q1 2023, the quarterly capital spending has been as strong as 9.0%. Still, in three of the last six quarters, there have been declines. Plant and equipment spending has evolved similarly. Housing spending rose at a sharp 6.7% annual rate in Q2 following a 10.1% annual rate drop in Q1 that was part of an ongoing three-quarter decline.

On the trade front, the balance of trade has been through some substantial gyrations, including two surpluses in the last six quarters. Exports rose by a solid 5.9% annualized in Q2 but only after a drop in Q1 at a 17.2% pace. Similarly imports rose at a pace of 7.1% compared to a Q1 drop at a 9.6% annual rate.

Domestic demand rose at a 3.5% annual rate in Q2 snapping a four-quarter declining streak.

Annual trends Year-on-year GDP growth has been fairly steadily slowing and has posted declines in each of the last two quarters. Private spending has been negative for four quarters running, but the weakness was trimmed in Q2. Public consumption rose year-on-year in Q2, and that was the first net gain in six quarters.

Gross fixed capital formation has been slow and slowing. Plant and equipment spending has been erratic around small gains and losses year-on-year. Housing spending has contracted year-on-year for the last three quarters.

The annual GDP net exports result has been a positive balance in four of the last five quarters but in Q2 that four-quarter change has turned negative. Exports have logged low positive growth until this quarter when the year-on-year growth rate posted at -0.2%. Imports have been declining over the previous four quarters but logged growth of 2.5% in Q2 2024 to break that string.

Domestic demand has been shrinking year-on-year for four quarters in a row. The tendency, however, has diminished; it produced a small 0.1% contraction in Q2.
by:Robert Brusca
|in:Economy in Brief
United Kingdom| Aug 14 2024
U.K. Inflation Is Too High and Not Falling
Inflation in the U.K. measured by the CPIH rose by 0.3% in July after rising 0.3% in June; these two months reflect a step up from May’s increase of 0.1%. The CPI excluding energy, food, alcohol, and tobacco (core) rose by a sharp 0.5% in July after rising 0.3% in June and 0.2% in May. The pattern and path of the core inflation rate for the U.K. is much more stubborn and worse than for the headline (which, itself is high and stubborn). Nonetheless, in its last meeting, the Bank of England instituted a rate reduction amid split views among Monetary Policy Committee members. At the time, it was noted that the rate cut may turn out to be an isolated one, and it could be some time before the next reduction comes around. A number of members (MPCs) had thought it was premature to cut rates and you can clearly see why by looking at the level and trend for inflation now.

The BOE rate cut was criticized by some as having substantial political overtones and the same charge was made in Japan about its recent rate hike. Meanwhile, with presidential elections coming in the U.S., and inflation over the top of its target for over 40 months and running, the Fed has a policy that seems to be tilted toward producing rate cuts. While, so far, U.S. data seem to be ‘somewhat amenable’ towards that glide path, it still is not a locked-deal that the Fed is going to cut rates in September, although some people think so. Not only does the U.S. have a long period of inflation overshooting but both presidential candidates seem likely to further expand the already massive U.S. fiscal deficit. What exactly should Fed policy consider? Legacy misses? Prospective profligacy? Or short-term inflation that is behaving? Politics seemed to be intruding on monetary policy globally but also in response to very separate and individual national pressures. It’s ice cream everywhere, but in each country a different flavor of the month.

Sequentially headline U.K. inflation is up 3.1% over 12 months; it's up to a 3.2% annual rate over six months and steps down ever-so-slightly to a 2.9% annual rate over three months. The core rate, referred to above, is up by 4.1% over 12 months, accelerates to a 4.9% annual rate over six months, then steps back to a 4.1% annual rate over three months. The core rate is clearly an excessive rate of change, and the headline is certainly stubborn and possibly stuck at its current excessive pace.

Globally, economies have slowed in the wake of the recovery from the Covid recessions; governments are eager to try to either restore or to preserve growth quickly. The task of making monetary policy has been greatly complicated by having had COVID and having had strong responses from fiscal and monetary policy, a legacy that currently is in the late stages of producing lingering stimulus. The success of Covid stimulus in reviving growth has emboldened policy officials. In addition, as the Covid process was winding down, a war was started by Russia by invading Ukraine and that created a secondary inflation surge it has made policy more difficult. Of course, during this period, the U.K. was also undergoing a transition known as Brexit. This is just a little bit like taking all the colors on your palette and mixing them together and wondering what sort of wonderful result you'll get, and being disappointed that all you wind up with is muddy brown.

Inflation diffusion measures the breadth of inflation and shows that inflation is decelerating on a timeline in more places when it's below the 50% mark. Diffusion for the U.K. shows that monthly inflation from May to June to July, which had indicated deceleration was now transformed to acceleration as diffusion in July moved up to 54.5% after having approached the neutral 50% mark with a 45.5% reading in June. Sequential inflation, which compares inflation over three-months to six-months and over six-months to 12-months and over 12-months to the 12-months before, shows a tempered but rising trend. Over 12 months there was a significant deceleration of inflation with diffusion at only 18%, but that stepped up sharply to 63.6% over six months and this has since moderated to just below neutral for a reading of 45.5% over three months. This is not surprising since headline inflation in three-months compared to six-months is slightly weaker at 2.9%, down from 3.2%, and 3-month inflation for the core CPIH is down to 4.1% from 4.9%. So, the headline/core are pointed to some deceleration and having diffusion slightly below 50 suggests that most of the components are moving in that direction as well. That is good news. However, the movement, even though it's in the right direction, appears to be slow. Inflation is still quite stubborn at uncomfortably high levels. U.K. monetary policy is in a rough patch and seems likely to be there for a while.
by:Robert Brusca
|in:Economy in Brief
Global| Aug 13 2024
Sharp Drop in ZEW Expectations and Eco-Conditions; But...Why?
Expectations fell sharply in August as the German reading by ZEW financial experts fell to +19.2 from +41.8 in July, halving July’s estimate of one month ago (yikes!). Macroeconomic expectations for the U.S. economy also fell very sharply to -24.9 in August from -13.5 in July. These drops are extremely sharp and would appear to have been strongly influenced by the temporary and substantially reversed market reaction to the U.S. July employment report that seems to have wrong-footed a lot of markets. For the time being, I would say that the jury is out on the sharp decline in these expectations and other assessments, simply because we don't really understand them or what might have motivated them, apart from a sharp weakening in market conditions that has since largely been reversed.

The economic situation is mixed but mostly weaker In contrast, the economic situation in the euro area improved to -32.4 in August from -36.1 in July, as Germany conditions deteriorated to -77.3 in August from -68.9 in July. In the U.S., market conditions also regressed sharply to a reading of 8.7 in August from 31.5 in July. These changes dropped the assessment of the German economic situation to its lower 13th percentile, the U.S. to its 37.5 percentile and the euro area to its 44.8 percentile of them below their historic medians (which occur at a 50-percntiel reading). For Germany, this is an extremely weak reading.

The drop in expectations The drop in expectations and contrast took the German assessment only back to about its 48th percentile in terms of its queue standing, while the U.S. queue standing fell to its 18.6 percentile in the lower one-fifth of all its historic readings. Clearly the ZEW participants substantially marked down their current assessments and their future assessments even though, at least in the U.S., macroeconomic data have continued to be formative and firm except for that one July employment report that as we now-know was flawed but was not flagged that way by the Bureau of Labor statistics in the U.S.

Inflation expectations inflation expectations are little-changed on the month but show inflation moving more towards the path of normalcy albeit still with very weak readings; for example, the queue standings range from a low of 7.4 percentile in the U.S. to a high of a 16.7 percentile in Germany. These span readings that are weak or weaker. The assessments give a euro area response in August of -39.1, up slightly from -41.1 in July. The German reading rises to -32.5 in August from -39.9 in July. The U.S. reading for August moves up to -47.7 from -55.8 in July. These changes point to less disinflation (more inflation).

Interest rate expectations (or fears vs. hopes?) Both short-term and long-term interest rate expectations, in the euro area and the U.S. for short-term rates and in Germany and the U.S. for long-term rates, move to weaker readings, something that again is in synchronization with the surprisingly weak July employment report issued by the United States. The euro area short-term expectations generated a rating of -82.0 for August compared to -80.9 in July, a small weakening. In the U.S., there is a drop to -83.9 in August from -73.8 in July, a relatively large drop for readings that are already quite weak, bringing it down to stand within the lower one percentile of its lowest reading in its historic queue of values. I have to say at this point that there is nothing in U.S. data that would seem to have justified this now. It must be that the survey week for the ZEW participants occurred during the most are tense part of the market sell-off in the U.S. because current economic statistics simply don't seem to support this kind of a view on the economy anymore- even admitting that expectations are mixed across market participants. There were draconian mark-downs in growth and expectations and in projections of central bank rates in the immediate aftermath of the release of the July U.S. job report. ZEW participants, in this survey, have set long-term rate expectations for Germany slightly lower as August fell to -23.1 from -22.9 in July. And the U.S. long-term rate expectation is even weaker at -29.9 in August, down from -21.3 in July. These readings for August leave the German expectation in the lower 4.7 percentile of its historic range while the U.S. reading is in the lower 2.2 percentile of its historic range.

The stock market knows no Kryptonite Look, up in the sky, it’s a bird! It’s a plane! No! It’s the stock market!! - An interesting contrast to all the numbers above is that when we go to look directly at the stock market, we find only small markdowns for the U.S. and for Germany as well as for the euro area. The euro area’s assessment falls to 21.2 in August from 25.8 in July. For Germany, the assessment falls to 20.1 in August from 26.6 in July. In the United States, the August reading of 19.2 compares to a reading of 23.5 in July. Thes are small moves compared to other surveyed elements. The stock market readings have queue standings in the 18th percentile for the euro area, the 13th percentile for Germany, and the 33rd percentile for the United States. These are weak but of course nothing like the kinds of drops we have seen in the market indexes (since reversed) in the wake of the BLS employment report. These responses leave me at least confused about what the ZEW experts are reacting to and what they really think is going to happen in the future if stocks are ‘fine,’ but growth is not. Stocks are already richly valued. Aren’t they vulnerable to a softened outlook?
by:Robert Brusca
|in:Economy in Brief
Germany| Aug 09 2024
Germany Finalizes Inflation with Acceleration
German inflation is accelerating, rising month-to-month by 0.2% in May, by 0.3% in June, and by 0.5% in July. A broader acceleration sees the HICP up by 2.7% over 12 months, up at a 3.5% annual rate over six months, and up at a 4.1% annual rate over three months. Domestic CPI inflation excluding energy is on a rising path, up by 2.7% over 12 months, up at a 2.6% pace over six months then clearly accelerating, rising to a 3.1% annual rate over three months. The domestic headline inflation rate provides a counter-point, rising 2.3% over 12 months, accelerating ever so slightly to 2.4% over six months then sitting back at a 2% pace over three months.

Germany is in step with the other large economics in Europe as Spain and Italy both report core inflation accelerating over six months compared to 12-months and for 3-months compared to 6-months. Germanys 3.1% ex-energy rate increase is slower than Spain’s and Italy’s where the core rates rise by 4.3% and 3.5%, respectively.

The numbers on inflation are disappointing but not all threats are worsening. Brent oil prices are not stoking pressures as oil prices fell by 7% month-to-month in May, rose by 0.3% m/m in June and rose by 0.1% m/m in July. There is also good news from diffusion as inflation only accelerates year-over-year compared to a year ago in 18% of the major industry groups. Over six months, inflation accelerates in only 45.5% of the groups compared to their 12-month pace. Over three months, inflation accelerates in 36.4% of the categories compared to their pace over six months. So, the inflation acceleration Germany records is partly a matter of ‘bad luck’ in the sense that inflation is heating up the most in the categories that carry the largest weights in the index. Similarly, monthly inflation shows diffusion below 50% in two of the three most recent months.

Inflation is accelerating from 12-months to 6-months to 3-months for transportation equipment. It accelerates in 6-months and 3-months for ‘other’, recreation & culture, and transportation equipment again.

Inflation decelerates from 12-months to 6-months to 3-months for alcohol, health care, communications, and restaurants & hotels.
by:Robert Brusca
|in:Economy in Brief
Japan| Aug 08 2024
Modest Rebound in Japan’s Economy Watchers Index
The economy watchers index rose to 47.5 in July from 47.0 in June, indicating less contraction on the month. Similarly, the future index improved to 48.3 in July from 47.9 in June, also signaling less deterioration is expected in July compared to June.

The current index has a 50.6 percentile standing on data back to 2003; the future index is slightly weaker at a 46.6 percentile standing. The current index is just above its median mark while the future index is below its median on that same period.

There are no indications of steady net gains being made over 12 months, six months, and three months for either the current or future surveys. That is not reassuring. However, there is persistent deterioration for five current components and five future components. The future declines that register persistent erosion also display net diffusion readings below 50 in July; so do four of the five current readings. Household-related metrics show a preponderance of persistent weakness. In the current survey, it is housing, employment, and eating and drinking places that are persistently weaker from period to period. In the future index, it is also household-related measures that are persistently weak: households overall, retailing, housing, and employment. Consumer-related sectors are weak and weakening.

The economy watchers survey shows momentum weakness as well as weak standings. The current index has four of nine components with standings below their historic medians and seven with diffusion values below 50, indicating contraction. In addition, the ranking of the employment metric at 22.1% is the lowest of all current components and that is disturbing. The future index has five components with rankings below 50% in addition to the headline. Eight of nine components have diffusion values below 50, as well as the headline. The weakest future standing is for housing at a 24-percentile value, but employment is also extremely weak with a 31-percentile standing.

The chart on the economy watchers survey shows that weakness was arrested over the last two months. Still, there is not much of a rebound established and there are still modest-to-weak readings all around. Broader momentum still points lower since the rebound as it stands is only a very localized affair. Despite two months of diffusion improvement, this is still a report that does not offer a lot of encouragement.
by:Robert Brusca
|in:Economy in Brief
Germany| Aug 07 2024
German IP Grows in June But Still Has Weak Momentum
German industrial production rose 1.4% in June after falling 3.1% in May and edging up by 0.2% in April. Sequential growth rates do not set a clear course, but on all horizons, growth is weak or lower. IP falls by 3.9% over 12 months, rises at a 0.9% annual rate over six months, then falls at a 5.8% annual rate over three months. Three-month growth is weaker than 12-month growth, but there is a rise in-between, over six months. Still, the overall pattern is weak. In the quarter just completed, IP falls at a 5.1% annual rate. Also, note that there is a legacy of weakness in IP that is still standing in June, 10.6% below its level in January of 2020 (4 ½ years ago) just before COVID struck.

The IP sectors show the same trend ambivalence as the headline. Only capital goods show output decline on all horizons, but even then, the progression is not clear as the weakness dissipates over six months.

Total manufacturing output and real orders rose in June as real sales fell. Sequentially, manufacturing output is weaker over three months than over 12 months but without clear trend. Real orders rise solidly over three months despite a double-digit pace of decline over 12 months and a deeper drop over six months. Real sales do show a clear trend and a trend to deterioration amid negative growth rates.

Other indicators for German industry show an uneven monthly sequence. The broader sequential data show strengthening over three months compared to six months for the ZEW current assessment, for IFO manufacturing and for IFO manufacturing expectations. The EU Commission assessment shows a weakening from 12-months to 6-months to 3-months. It is the exception. All indicators except the EU Commission indexes show improvement in the quarter as well.

IP in other European countries shows declines in Portugal, Spain, and France while Norway (an EEA member) shows output higher in June by 1.3%. The broader progressions show ongoing deterioration in Portugal and in France. There is secular improvement in Norway as growth improves form a -0.9% pace over 12 months to a 4.1% gain over three months. Spain shows erratic behavior with no clear trend and a sharp 10.1% annual rate of decline over three months.

On balance, the IP report for June shows a one month rebound for Germany but still weak trends in place across sectors. Other indicators show a somewhat more positive picture. Individual European IP reports largely show weakness in play. There is not much cause for optimism here.
by:Robert Brusca
|in:Economy in Brief
Germany| Aug 06 2024
German Orders Stir in June But Are Still Quite Weak
Real German industrial orders rose 3.9% in June after falling 1.7% in May and 0.6% in April. The sharp rise in June has driven the three-month growth rate into positive territory to 6.4% at an annual rate. Orders in June were largely driven by domestic orders that rose by 9.1% in June after rising 0.4% in May and being flat in April. Foreign orders rose by 0.4% after falling 3% in May and 1% in April. June was a good month for German orders especially for domestic orders; however, the trend for German orders is still poor (see the year-on-year growth data-plot chart).

Sequential trends Sequential growth rates show that 12-month growth for real orders is -11.7%, over six months the annualized growth rate is -20.9%, and over three months that trend reverses to plus 6.4% at an annual rate. Foreign orders fall by 15.5% over 12 months, they drop at a 28.3% annual rate over six months, and that pace of decline is reduced to -14% at an annual rate over three months. Domestic orders fall 6.1% over 12 months, they drop at an annual rate of 9.4% over six months and then rebound strongly, growing at a 44% annual rate over three months. The progression of German orders is largely negative until the last 3 months when the negative paces reverses quite sharply in the case of domestic orders and in the case of foreign orders the pace of decline is simply diminished.

Manufacturing Overall manufacturing sales fell 0.9% in June after falling 0.3% in May and 1% in April. For manufacturing, there's a sequential decline that is getting progressively worse from -5.1% over 12 months to -6.2% at an annual rate over six months to -8.7% at an annual rate over three months.

Sector sales Sector results show consumer goods sales in June fell by 3.7%, consumer nondurables sales fell by 5.1% with durables sales rising by 4%. Capital goods sales fell by 1.7% and intermediate goods sales rose by 0.7%. That's rather a hodgepodge of pluses and minuses. However, taking a longer string of data, consumer goods sales are progressively contracting from a -4.9% decline over 12 months to a -6% rate of decline over six months to -12.7% rate of decline over three months. That progression is driven by nondurable goods that get sequentially worse, while consumer durable goods sales show the opposite trend, progressive acceleration from -6.4% over 12 months to a +5.3% pace of expansion over six months to a +13.3% pace of expansion over three months. Capital goods sales do not give us a clean reading on trend; sales are negative over 12 months; the negative growth rate worsens over six months but then it's trimmed back over three months. However, capital goods do show negative growth rates over each horizon. Intermediate goods are also confusing hodgepodge of growth rates with -4.5% growth over 12 months, 0.2% positive growth over six months and then -9.3% growth at an annual rate over three months.

Quarter-to-date The quarter-to-date calculations show that overall orders are falling in the recently completed second quarter by 5.3% at an annual rate, but this is the result of a nearly 12% annual rate decline in foreign orders tempered by an increase in domestic orders of about 5%. Across sectors, we find declines in the quarter for all sectors except for consumer durable goods but they post a significant growth rate of +8.9% at an annual rate in the quarter.

Industrial Europe Measures of industrial confidence for Germany and the three other largest economies in the European Monetary Union also give us a mixed picture; in the current month all three of them score a negative values for industrial confidence. However, over the last three months there's very little trend involved for either Germany, France, Italy, or Spain; they're all pretty much hugging a consistent negative growth rate on the period. And the same is true when we look for sequential growth rate patterns from 12-months to 6-months to 3-months. All four of these countries continue to present pretty much the same values without any clear trends over the period. Additionally, we create queue standings for these four countries and find that they are all in June below their mean values on data since 1990. The weakest standing is for Germany with a 16-percentile standing. The strongest is for Spain with a 42-percentile spending, with France at 37-percentile and in Italy at a 23.5 percentile standing.
by:Robert Brusca
|in:Economy in Brief
Global| Aug 05 2024
Global Composite PMIs Tail in July
Composite PMI data for July show a slight worsening compared to June across most of the 24 countries and areas reporting composite PMI data. Among the 24 countries and areas that supply early data on this measure, only 8 show improvement month-to-month in July that's after seven showed improvements in June.

The unweighted average for the sample shows a slight cooling to 51.6 in July from 51.9 in June continuing the slowdown from 52.9 in May. However, median statistics provide a slightly different picture, with the median reading in July strengthening the 51.2 from 50.8 in June compared to a median value of 52.3 in May. On both average and median metrics, there is a weakening from May to July that averages a downgrade of about one diffusion point.

Sequential data showing performance over 12 months, six months, and three months indicate little change across reporters for the average metric. The 12-month average is at 51.5, the six-month average moves up to 52.2 and the three-month average moves down to 52.1. Median data over 12 months show a reading at 51.3 moving up to 51.8 over six months and then moving back down to 51.3 over three months. Conditions are relatively static at readings just slightly above the breakeven diffusion value of 50.

In July, there are 7 reporters with PMI values below 50, indicating overall economic contraction. That compares to 8 in June and 4 in May. Sequential data show 8 jurisdictions below 50 over 12 months, 6 below 50 over six months and 5 below 50 over three months.

Tendencies to decelerate have fluctuated, with 40% showing deceleration month-to-month in May compared to 72% in June and 56% in July. Looking at the averages from 12-months to six-months to three-months, 52.2% of reporters show slowing over 12 months compared to 12-months ago, 30.4% show slowing over six months compared to 12-months, and 56.5% show slowing over three months compared to six-months. There is no trend here and there's little evidence of any significant strength. But there is growth.

The queue percentile standing data stand on average at 41.2% with a median at 38.1%; these are roughly similar figures showing that the average or median representative country is below its mean/median by about 10 percentile-standing points. Eighteen of these 24 jurisdictions have percentile standings below their 50th percentile, while only 6 have standings above their fiftieth percentiles. However, in terms of diffusion standings, only seven jurisdictions have readings that are below the diffusion value a 50 which indicates not just underperformance but economic contraction.
by:Robert Brusca
|in:Economy in Brief
Global| Aug 02 2024
Money Supplies Bounce Back; Money Growth Is Up Ahead of Central Banks Taking Strong Rate-Cut Action
The money supply picture in June is beginning to turn with growth on the rise. In the European Monetary Union, M2 growth progresses from a 1.3% pace over 12 months to 2.1% over six months and accelerates to a 4.3% annual rate over three months. The rate of growth in private credit in the Monetary Union is 0.8% over 12 months, moves up to 0.9% over six months, and to 1.6% over three months.

Real money growth: EMU- Indexing these variables for inflation to look at rates of growth in real money balances in the European Monetary Union, shows a decline of one-half of one percent over 12 months, a decline at a 0.3% annual rate over six months and an increase at a 0.7% annual rate over three months. Monetary growth has completed the progression from being in a contractionary mode to being expansionary in real terms. Real private credit has not yet made that turn. The growth in credit over 12 months is -1.7%. That contraction is reduced to a pace of -1.5% over six months, but then, over three months private credit growth contracts 2% at an annual rate. On balance, real private credit growth continues to be restrictive.

Other monetary centers- Turning to the other major monetary center countries, we see positive nominal money growth in U.S. M2 and U.K. M4 over three months, six months, and 12 months. Japan moves in the opposite direction with growth rates of money slowing down and showing contraction over three months. Japan has been on the opposite cycle for some time. Japan just this week executed a rate hike as all the rest of the money center central banks have begun or are anticipating interest rate cutting. The ECB began cutting rates a while ago. The Bank of England cut its key policy rate just this week while the Federal Reserve had a meeting this week and decided not to cut rates although it began to point to September. In the wake of some surprising data, especially the U.S. employment report for July, U.S. markets have gone a little nutty, and they're starting to price in not just a rate cut but a large rate cut and several of them. The U.S. case marks a strong change in market pricing. I would caution what markets are doing on the heels of this employment report since the employment report clearly showed that there were flaws. A large increase in the number of workers who were not able to work because of weather conditions and yet markets have completely ignored this and treated all of the weakness in that report as though it's authentic weakness. It's not clear that that's the case, but for now markets are on that bandwagon- keep an eye on U.S. data.

The growth rate in U.S. real money balances shows that, without the Federal Reserve changing policy, money growth has become stimulative. Over 12 months the U.S. monetary aggregate M2 declines by 1.9%, over six months it declines at a 0.2% annual rate, and over three months it increases at a 2.6% annual rate. U.K. 12-month money growth in M4 declines by 1.9%, then it increases at a 0.8% pace over six months and at a 0.7% pace over three months. In Japan, with a tightening kicked off, the 12-month growth rate for M2 plus CDs is -1.3%. That stays pretty level at -1.4% at an annual rate over six months, but over three months that tightens considerably to a decline rate of -4.9% at an annual rate. Japan is barely touching the brakes on interest rates while money supply is showing some significant weakness. Since late-2022, Japan's M2 growth has been consistently showing declines; about a year ago, Japan began to show some slight increases. However, declines are back and now they're starting to progress to even weaker numbers. Japan’s situation is still in flux as its headline inflation rate has been moving up, but its core inflation rate has remained relatively stable and to right around its target rate.
by:Robert Brusca
|in:Economy in Brief