Haver Analytics
Haver Analytics

Economy in Brief

  • Financial market instability has been in the ascendancy over the past few days as investors shunned risk assets and flocked to safe havens such as government bonds (chart 1). A key catalyst was last Friday’s weaker-than-expected US employment report (chart 2) but there have been other factors that have amplified investor concerns. These include last week’s decision by the Bank of Japan to lift its policy rate and the impact of this on so-called carry trades (chart 3) coupled with heightened anxiety about the potential profitability of big US technology companies (chart 4). Geopolitical concerns regarding the Middle East together with thin summer trading conditions have additionally played a role. All that said, markets have returned to calmer waters over the past 48 hours, partly thanks to some dovish comments from central bankers, and most notably BoJ Deputy Governor Uchida. Concern about the impact of financial instability on the world economy could, in any case, have been over-baked. This week’s US dataflow have certainly been more reassuring (chart 5). That inflation has been ebbing and there is now greater scope to relax monetary policy ought to also help allay recession fears (chart 6).

    • Wholesale inventories rise for third consecutive month.
    • Sales reverse two monthly gains.
    • Inventory/sales ratio increases to roughly one-year high.
    • Initial claims lower than forecast consensus.
    • Gradual uptrend in total beneficiaries continues.
    • Insured unemployment rate extends 1.2% through a 16th month.
  • 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.

    • Revolving credit outstanding declines.
    • Nonrevolving credit gain accelerates.
    • Purchase applications edge higher while refinancing continues to surge.
    • Interest rate on 30-year fixed-rate loan declines sharply.
  • 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.

    • Trade shortfall is smallest in three months.
    • Export gain outpaces import increase.
    • Trade deficits with China, Japan & European Union narrow.