Economy in Brief

The plot of the economy watchers readings since mid-2024 paints a pretty clear picture of the performance of the economy according to this metric. The chart shows the summary. The future conditions index, the current conditions index, and the reading for current conditions employment, have all been below diffusion values of 50 on a fairly steady basis. In addition, there has been little tendency for trend to take hold; there appears to be some modest up trending going on from early-2024 to later in the year. However, more recently we see some backfilling in terms of that progress. All told it's hard to make too much out of these readings other than to note that diffusion values have been slightly below 50, indicating slight deterioration in current conditions, in the employment market, and for expected future conditions. The results are not draconian. It's really just been a period of slight underperformance by the economy and for expectations for the future and in terms of the job market.

December Current Index In December, among the nine component readings for the current index, four of them produced diffusion values above 50, indicating some net expansion. Corporate nonmanufacturers registered 50.5, the household sector generated a rating of 50.2, retailing came in at 50.4, while the services sector produced the highest reading at 51.1. All of these are readings very close to 50 and are not showing much in the way of growth. But being above 50, they are signaling some small net expansion. The contracting side of the ledger in December shows eating and drinking places with the diffusion value of 46.9, housing at 46.5, corporate manufacturers at 47.2, the overall corporate reading at 49.1, and the employment reading at 49.7. The current reading is an echo of the performance of the headlines plotted in the chart at the top, indicating a close clustering around the value of 50. There are a few sector readings with diffusion values slightly above 50 and a few with readings below 50. However, over 12 months we have net declines for all of the readings except for housing and for retailing.

Diffusion ratings pertain to month-to-month activity comparisons while the queue standings describe the December diffusion index ranked among its historic data on a longer timeline back to 2002. The ranking data put a slightly different spin on events because the current index, which is at 49.9, showing the barest decline in terms of the diffusion index, also has a queue standing at 69.6% which tells us that over this span the index has been stronger only about 30% of the time. A modest contraction is actually significantly stronger reading than Japan has been used to seeing over this 20-plus year period. Looking at the rankings across the components, we find only two have a percentile standing below their 50%-mark, employment at 29.2% along with corporate manufacturers at 47.8%.

December Future Index The future index has a diffusion reading of 48.8; that shows a weakening compared to November's reading at 49.4. In December only two components have readings above the 50th percentile, services at 52.8 and nonmanufacturing corporations at 50.1; the latter is as bare bones a reading above 50 as possible. The remaining readings are below 50 indicating net contractions. The lowest being housing at 44.5, with three readings in the 47-diffusion range for corporate manufacturers, for eating and drinking establishments, and for retailing. As we saw with the current index, the 12-month change in the future index also shows a drop in the headline of 1.6 points with drops logged across most components with an increase only in nonmanufacturing corporations and an unchanged reading for retailing.

Queue percentile standings are weaker for the future index than for the current index. Its standing is only at 51.4% for the headline with four components having readings below the 50% mark, but for the most part, significantly below the 50% mark corporate manufacturers have a percentile standing at 45.1%, eating and drinking places have a ranking at 41.5%, housing has a ranking at 40.7%, and on the outlook for employment there is a reading at 30%.

On balance, the economy watchers index does not indicate much change in Japan's economy in December. The outlook deteriorates slightly from November, but it's still roughly unchanged in its diffusion value showing only slight deterioration; that continues to be the overall picture just as for the current index where deterioration continues to be the picture despite some reduction in the pace of slowing this month. The queue standings, however, show that the current index is posting numbers that are relatively firmer compared to what they've been over the last 20 years or so. The future index is much more modestly positioned compared to its historic readings.

The OECD seven-country LEI rose in December and is gaining at an annual rate of 1.1% over three months, up marginally from a pace of 0.9% over six months and doubling its growth rate over 12 months. Still, all of these are modest numbers. Japan’s LEI was flat in December and shows LEI declines over three months, six months and 12-months. The U.S. shows a gain of 0.2% in December with a 1.8% annual rate rise over three months, a 1.3% pace over six months and the same 0.5% gain year-over-year as for the OECD7. The index levels show an OECD7 queue standing in its 66.8 percentile, the U.S. a tad stronger at its 68.2 percentile and Japan much weaker and below tis median pace at a 36-percentile standing.

The OECD likes to judge these indicators over six months. So, I construct six-month averages, and we see the same 0.4% U.S. and OECD7 gains on this average for its change month-to-month in December and November for both. Japan turns up flat in December on this metric and shows declines over three months and 12 months. In contrast, China shows declines on this averaged gauge in December and in November but shows growing momentum from 12-months to 6-months to 3-months. The 6-month growth rate show strength in the rankings for the U.S., China, and the OECD7. But Japan also sputters in terms of growth rates on 6-month changes with a 36-percentile standing.

The amplitude adjusted metrics show only France persistently with a reading below 100 - but Japan walks the line. The ratio to six months ago shows only Japan and Germany weakening. The queue standings show only Japan and Germany, with readings below their respective medians (values below 50%).

The OECD data are not very reassuring. While conditions show basic advancing trends, they are advancing slowly with little evidence of strength. The U.S. has the strongest standing on OECD index levels and growth rates, and they are largely in the 68th and 81st percentile ranges. Germany and Japan sport 36-percentile standings for their LEI index levels on amplitude adjusted readings. These are very weak reading for two important economies.

In our first economic letter of the year, we focus on China. Despite positive economic surprises in recent months (Chart 1) and growth now on track to meet the “around 5%” target, China’s recovery remains uneven and subject to downside risk. In response, China’s authorities have rolled out more fiscal and monetary easing measures (Chart 2), broadening both their scale and their scope. However, some observers continue to question whether these measures will be effective, particularly in addressing deeper structural issues.

Amid expectations of low interest rates and concerns about a deflationary spiral, investors have bought more Chinese bonds, driving yields to record lows (Chart 3). The continued decline in bond yields prompted the authorities to intervene on Friday and halt further bond purchases. Looking ahead, China faces several challenges, with US trade policy, in particular, a key concern (Chart 4).

Ahead of potential US trade actions, producers and importers have taken precautionary steps, boosting supplies, and thereby driving China’s export growth in recent months (Chart 5). Nonetheless, export prices have continued to decline, and the yuan has weakened further. Against this backdrop there will be much interest in this week’s upcoming data releases, including the highly anticipated Q4 GDP report (Chart 6).

Recent developments Although there have been some positive developments, lingering macroeconomic challenges persist. On the one hand, the extent of economic surprises in China, as shown in Chart 1, remains largely positive, with a flurry of positive surprises late last year. On the other hand, concerns in sectors like the property market continue to weigh on the economy. Moreover, the pace of China’s economic recovery remains uneven across sectors, as reflected in the latest PMI readings. The manufacturing sector shows only mild expansions, while the non-manufacturing sector continues to grow at a faster pace. Nonetheless, President Xi has recently stated that China is on track to meet its growth target of "around 5%" for 2024. China’s real GDP growth has certainly stayed close to the 5% target, narrowly missing it with a 4.8% year-over-year growth in Q3.

French retail sales volumes fell by 0.1% in November after falling by 0.1% in October; July was the last month to produce a month-to-month increase in retail sales volumes. In July 2024, those volumes increased by 0.2%. Sales volume trends in France continue to be weak.

Year-over-year growth rates for all products show a 0.1% decline in volume which has a 51.7 percentile rank on data back to mid-2007. Among the various categories, food purchases have a sub-50-percentile ranking as do electronics and the sales of new autos. These sub-50-percentile rankings indicate that the current year-over-year growth rates are below the median growth rate for year-over-year sales since mid-2007. It's unusual to see food rank so low; however, automobiles and electronics certainly count as discretionary purchases and if the economy is under pressure we would expect to see some weakness in electronics and in auto sales; that appears to be the case in France.

Other categories show sales rankings that range from firm-to-strong. Strong sales emerged in footwear, a small-ticket item, where an 84.2 percentile standing derives from a year-over-year growth rate of 7.2%. Household appliances, a heftier household expenditure, show a 5.1% increase in sales volumes for an 81.8 percentile standing, also a strong result. Furniture sales, where the growth rate is a milder 1.3%, still scores a 71.3 percentile standing for this period. Textile sales are up by 1.5% year-on-year, which scores an above-median 67-percentile standing. For all industrial goods, a 0.5% increase in spending marks a 56.5 percentile standing overall, a small gain above its historic median rate.

German industrial output advanced in November but is currently riding a string of 18 straight months of year-over-year declines for output excluding construction (the headline series).

The increase in monthly output marks ‘one in a row,’ two increases in the last four months, and three increases in the last six months. There have been six month-to-month increases in the last 12 months. Still, the year-on-year change is -2.8%, an improvement from drops of five-percent or so in September and October but August of 2024 showed a year-on-year drop of only 2.7%; yet, that was not a signal of coming improvement.

Apart from output itself, order momentum is not improving. Real manufacturing orders fell by 5.4% in November after falling by 1.5% in October, but that series has risen a strong 7.2% month-to-month in September. Real orders show a progression toward less decline over three months, six months, and 12 months. Still, the quarter-to-date annualized change in real orders is falling at a 7.1% annual rate.

On balance, it is hard to say that there is any light at the end of the tunnel for German output and its prospects based on IP trends or on real-order trends.

Sales trends are not much better although real sales rose by 1.4% in November; the decline over three months, six months and 12 months and have ‘generally’ been weakening.

Surveys show weakened trends from 12-months to 3-months.

In addition, the queue standings of all the IP categories, orders, real sales and the relevant German surveys have low standings- in all cases below 50%- putting all of them below their historic medians. The surveys are especially weak with standings below the 15th percentile in all cases. Among manufacturing output, real orders, and real sales the strongest standing is orders with a percentile of 33%. For the IP headline series itself, the standing is at its 18.4 percentile; consumer goods is strongest at a standing of 31.2%, with capital goods at 22% and intermediate goods at 17.4%. The readings for manufacturing in Germany are weak no matter how you view them.

The table also surveys early IP data for Portugal and Norway. These queue standings apply to year-on-year growth rates, and both are above the German standing of 18.4%, with Portugal at 39% and Norway at a 52.7 percentile standing above its historic median.

The far-right column also assesses the current IP level relative to where it stood on January 2020. The IP headline index is 12 IP index points lower. Construction is 13 index points lower; manufacturing as a total is 10.8 points lower, similar to the drops for real manufacturing orders and for real manufacturing sales. The surveys are on very different scales. The ZEW current index is 81.9 points lower, with the IFO manufacturing index lower by 8.8 points. Despite the difference in the construction of these indexes, these drops both have percentile standings in the 4% to 5% range. Skipping down the table, we quickly see Portugal has fallen by 9.9 IP points compared to its January 2020 level, while Norway has risen by 1.1 point and has an above-median standing, as a result.

These data are disappointing. Quite apart from the near-term momentum – which is weak- the big picture is severely impacted. And it is not getting better despite a small increase in the November output.