Economy in Brief

UK improvement is shallow - The UK total orders position improved in November, but the reading went up to -19 from -27 in October, remaining deeply in negative territory. Looking ahead over the next three-months, finds volume improved to a +9 reading from -1 in October, while prices expected over the next three-months move sharply higher to a reading a + 11 from a reading of zero in October. The month-to-month movements show changes in the positive direction; however, the readings show that orders are still net negative readings and the broader standings for these assessments are still low.

Orders- Total orders in November that moved to a - 19 reading also represent an improvement from the 12-month average of -25, export orders that were unchanged month-to-month at -27 we're also stuck at the same average value they've had over 12-months at -27. On the export front, orders reveal that nothing has changed at all.

Stocks assessments- Stocks of finished goods rose to a + 21 level from +17 in October and compare to a 12-month average of 13. Rising inventories at a time when orders are not improving may be an ominous indication of what lies ahead. The outlook for volume three-months ahead improved month-to-month but the +9 reading from November compares to a +8 reading over its six-month average and a + 8 reading for its 12-months average. November shows an improvement from October but not much of an improvement from what had been the main conditions over the last 6- and 12-months.

Prices firm- Meanwhile prices are showing some pressure with the reading of +11 that is stronger than the +6 that we've seen over three-months and the average of +9 over 6-months. The November reading is slightly weaker than the +13 reading over 12-months. However, this sequence of readings seems to suggest that the disinflationary forces are abating and inflation at some level once again is going to become an issue.

Broader standing evaluated in November- Backing away from the diffusion levels and the survey levels per se, we can look at the queue standings for these levels to get a better assessment of where this months’ survey responses lie and a broader historic perspective than just month-to-month or over 12-months. Total orders evaluated over data back to 1992 have a standing in their 35th percentile. Export orders occupy their 31st percentile. The stocks reading for finished goods has a very high, 93.9 percentile standing, which, as I noted above, is not good news in an environment where the outlook for sales and orders is not expanding solidly. Output volume for three months ahead has a 46-percentile standing which is below the median value that occurs at a percentile standing of 50%. And while that's slightly below median, it's not dramatically below the median, and it comes closer to putting the UK economy back into some kind of moderate equilibrium even though there's a modest shortfall form the median in November. On the price front, the percentile standing is about at its 65th percentile, which makes it mildly inflationary. Inflation forces are above their median value on data back to 1992, however, a reading in the 65th percentile is only moderately firm. The more pressing issue is that it comes in a period where the UK has been running persistently excessive rates of inflation.

Compared to lagging IP trends- UK industrial production data are up-to-date through September. September showed a decline in industrial production of 1%, the three-month decline in this lagged industrial production reading is at about -4% annualized; over 6-months it's -2 1/2% annualized, and over 12-months it's a little bit less than a 1% decline. These sequential readings are not reassuring because they show that industrial production has been declining at increasingly faster rates of change rather than at diminishing rates of change. Output does not seem to be righting itself, even though in the CBI survey the outlook for volume has been firming back to 12-month average levels.

Summary and assessment- The outlook for volume has been oscillating in a very low range for the last two-years after going through a bust and boom cycle related to COVID and its aftermath. The expected volume series now is making some upward adjustment after a minor downturn that seems to have followed a modest upswing. There's nothing in this report that suggests that there's any kind of lasting improvement in the works, although it's reassuring to see that the recent weakness is dissipating. The order book balance, however, remains in deeply negative territory and while the CBI order readings had been much weaker during the COVID period, apart from the COVID period, we are looking at a string of consistent weakness that otherwise hasn't been seen at least back to 2014. In addition, there is some resurging pressure on inflation. All this makes picture for UK industry less than positive, despite some month-to-month improvement in November.

UK inflation jumped more than expected in October with the CPI-H rising 0.5% after being flat in September. The CPI-H core measure excluding energy, food, alcohol, & tobacco rose by 0.4% month-to-month after rising 0.1% in September.

Even though this is the UK reporting a bad number after a good number, its good number in September had followed another bad number in August so on balance the trend for the UK is remaining higher than the result that policy seeks.

Inflation’s trend - Sequentially headline CPI-H inflation is up by 3.2% over 12 months it's up at a 3.2% pace over six-months and it's up at a 3.6% annual rate over three-months. Those numbers compare to a 2% target for inflation in the UK; the core for the CPI-H that is described above, rises 4.1% over 12-months, rises at a 3.9% annual rate over six-months, and gains 3.7% at an annual rate over three-months. This rate shows some minor disinflation and progress but at a pace that's still terribly high and with the core rate higher than the headline rate on each of these sequential periods. That's disappointing because the core rate tends to be more stuck and it's harder to move.

Inflation’s breadth - Diffusion measures the breadth of inflation acceleration. That metric is at 54.5% in October, September, and in August. It tells us that the month-to-month inflation changes have had just a little bit more acceleration than deceleration over these last three months, a period when inflation has been running too hot. Sequentially, if we look at diffusion over 12 months, that diffusion is low with the reading of 18.2%. Over 12 months inflation is accelerating in only about 18% of the categories! But, of course, a year ago headline inflation was 4.7% and core inflation was 5.7% so it's not surprising that there's a broad deceleration from those sorts of numbers. Over six-months we find diffusion is a lot higher but the reading on diffusion is still quite low, showing a tendency for inflation to fall, since the diffusion index is only at 36.4%. Diffusion shows a lot more step down in inflation from six-months to 12-months than what we see in the actual inflation numbers measured either by the headline or the core CPI-H. The inflation rate over three-months, however, shows that diffusion marks inflation as accelerating again. Three-month diffusion is at 63.6% indicating that inflation is accelerating in nearly two-thirds of the categories over three-months compared to six-months. This is certainly not acceptable with the three-month inflation rate running at 3.6% and with the core slightly hotter.

Unemployment is low - During this period, the economy has continued to generate low unemployment rates. The unemployment rate in August is 4.3%. That compares to a 12-month-ago unemployment rate of 4.1% twenty-four months ago it was at 3.8%. There has been only a small rise in the unemployment rate from some extremely low numbers. The claimant rate of unemployment shows a little more up-creep at 4.7% in October that compares to 4.6% in August; it compares to a rate 6 months ago at 4.1%. The claimant rate is showing slightly more lift but still a relatively moderate rate of unemployment.

Summing up - These conditions are going to continue to make policy-making difficult at the Bank of England. Inflation is running hot, and it looks like it's stuck. The economy is performing reasonably well, judging from the state of the labor market. But there's also some evidence of economic weakness, certainly broader macroeconomic data have shown more weakness than just the unemployment rate. Policy in the UK is going to continue to face challenges as 2024 draws to a close.