The ISM index for the manufacturing sector is, in August, at its highest since May 2004. It was then at 61.3 versus 61.4 in May 2004.
The reading of this index is puzzling for different reasons
1 – Since 2011, the average growth in the US is 2.2% but the trend was 2.7% between 2000 and 2007. But the ISM index was, on average, higher since 2011 than before the crisis. Its average was 54.1 from January 2011 to August 2018 but only 52.1 from January 2000 to December 2007. A higher ISM index doesn’t not reflect a stronger growth momentum. We can see that also when looking at the manufacturing production index. On the same periods, the annual growth rate was 1.8% from 2000 to 2007 but 1.15% from 2011 to July 2018.
In other words, the index is higher than in the past while growth is lower.
2 – There is a robust index calculated by the Federal Reserve of Chicago. The CFNAI (Chicago Fed National Activity Index) is the synthesis of 85 indicators (industrial production, employment, personal income,….). It’s reading is easy with an average at zero and a standard deviation of one.
The CFNAI is an accurate measure of the business cycle based on observed variables. Usually the two profiles are consistent as the graph shows.
Recent data show a persistent divergence between the two. The CFNAI is close to 0 while the ISM is at a high historical level. It is probably too high giving a wrong signal of the US growth strength.
The synthetic index of the ISM survey in the manufacturing sector crashed in August. It is again below the 50 threshold. We can imagine that the recent improvement was temporary as the index was below 50 from October 2015 to February 2016. The August 2016 level is way below its historical average.
The drop in the ISM index reflects mainly the fragility of the domestic market as the new export orders index is stable above 50. This drop may be temporary but it shows that the American economic is not able to rebound strongly and permanently. That’s worrisome
I’m not sure that the US economy is close to the targets defined by the Federal Reserve and mentioned recently by Janet Yellen and Stan Fisher. We will still have to wait before the Fed hikes its main rate if it does it. Continue reading →
In April, there are still a lot of questions related to the strength of the global economic activity for the coming months.
Companies’ surveys in April from ISM and Markit do not show an improvement in the manufacturing sector. Nevertheless the momentum is stronger in the non manufacturing sector. The first point is worrisome as a slow dynamics in the manufacturing sector will lead to a poor performance in world trade. We cannot expect an impulse from this sector and therefore no spillover can be anticipated to the non manufacturing sector. The main source of improvement in the economic momentum always comes from a change in the manufacturing sector profile. This is not the case yet. Continue reading →
The main issue this week was the US employment figure as it may change the Fed’s mind on monetary policy. Nevertheless, employment is not the only aspect to mention to catch the US economy momentum. Another important issue, this week, is the rapid and deep drop of German industrial orders from outside the Euro Area. It’s a source of concern for the global investment dynamics. The last important point is the non-null probability of a rate lift-off at the Bank of England in 2016. Mark Carney has mentioned this possibility after the Monetary Policy Committee Meeting of the Bank. It’s not the first time that the BoE and Carney take this kind of commitment.
Eight points this week to follow the macroeconomic environment
1 – There was impatience to get the number of jobs creation in October in the US as it could be a trigger for a Fed’s rate move at its December meeting.
The number was strong at 271 000, way above expectations at 185 000. Nevertheless, the employment rate was almost unchanged for all classes of age and was unchanged for the 25-55 years of age. In other words, there were no supplementary pressures on the labor market even with employment surprising on the upside.
This figure comes after August and September during which the number of jobs creation was low. As a consequence, the average number of new jobs in the last 3 months is below the average of the 3 previous months: +187 000 in August, September and October versus 243 000 from May to July. Continue reading →
The first point is the downward revision by the ECB of its GDP and inflation forecasts for 2015, 2016 and 2017.
Three things to notice
1 – For 2015 the forecast is almost stable close to 1.5% and 1.8% for 2016. In spite of a very accommodative monetary policy, there is no improvement in the growth momentum in the forecasts’ profile. The pace is not so strong and slows moderately with the last publication (in September 2015) 2 – Inflation expectations are revised downward; for 2016 the expected inflation rate is just 1.1%. As there is no strong acceleration on economic activity, this figure could be lower. In this situation, can we expect a convergence to the 2% inflation target before 2020?Continue reading →
The first point to be mentioned is the lower momentum on US employment. In March, the number of new jobs was low at 126 000 versus 264 000 in February. January and February figures have been revised downward by -69 000. In a recent past, revisions were on the upside.
During the first quarter, less than 200 000 jobs were created each month on average (197 000 exactly) versus 324 000 for each month on average during the last quarter of 2014. The biggest change can be seen in “professional and Business Services” where the number of new jobs has been divided by a factor 2 between the last quarter of 2014 and the first of this year. In the manufacturing sector, 29 000 new jobs were created on average in the last three months of 2014. The number was just 6 000 on average for the first quarter. The unemployment rate was stable at 5.5%. The wage rate for the private sector was up, on average, by 2.1% which is its average change during the last 12 months. There are no new nominal pressures from wages. Continue reading →
Key element of the week starting February 2
US employment has increased a lot during the last three months. The number of jobs creation was strong in January (+257 000) and the upward revisions in November and December were significant. This can be seen on the graph below.
The report was full of details that show a real improvement in the labor market.
The first is the change in regime since last April. It continues in January 2015 and reflects stronger numbers since April. The second point is the strong inflow on the labor market from people who were out of the market. This means that the labor market attractiveness has dramatically changed. This is a positive signal.
On another point of view the employment rate for people between 25 and 55 years of age is improving rapidly. These people have had a succession of negative shocks. Employment has dropped rapidly in this tranche of age. Step by step they are coming back on the market. The “25-55” employment rate is now at 77.2%. It is still 2.8% below the business cycle peak in January 2008. That’s a situation I was expecting in order to have a real perception that the situation is converging to a more normal trajectory. The fact that people are back to the labor market is the main reason to explain the marginal increase of the unemployment rate. With this in mind, this is a good signal.
But the trajectory is still far from its long-term equilibrium and that’s why there are no pressures on wages yet. The average wage rate grows at the reduced pace of 2.2%. Other Important Issues
The situation in Greece is still fragile. Last week trips to visit European governments have not been a real success. They still have to convince that a switch between the current situation which expired on February the 28th and a new contract will be profitable for everyone. Alexis Tsipras speech late on Sunday the 8th is still close to Syriza program. On Wednesday the 11th for the Eurogroup and the 12th with the heads of government, Varoufakis then Tsipras will have to find support. A failure would drive to increasing the probability of a Euro Area collapse. (more in the document) The ECB has changed the refinancing conditions for Greek banks. Government bonds and bonds with the government guarantee will not be eligible anymore. The ELA instrument will be available but be more expensive than the usual procedure.
PMI indices were almost stable in January for the manufacturing sector in developed countries. Nevertheless, the US ISM dropped for the manufacturing sector; probably the impact of a low oil price.
Composite indices in the USA and the Euro Area were stable for the first and improving for the second.
In these surveys, emerging countries are still weak. China is below 50 and Russia in recession
Strong improvement in retail sales for the Euro Area in the fourth quarter (strongest since Q4 2006).
For the whole year the US inflation rate was just 1.3% for the headline and 1.4% for the core measure. Far from the 2% target for the preferred Fed’s target.
Due to poor growth prospects and to low expectations on commodity prices, the Reserve Bank of Australia has reduced its interest rate by 25 bp to 2.25%
Industrial production was up in Germany for the 4th quarter (2.5% after -1% in Q3) – + 1.3% in 2014
Very large surplus for the Chinese external trade: USD 60bn – Drop in imports (commodities) is the main explanation. But exports dynamics was poor also (-3.3% on a year)
What will happen this coming week?
The main issue will be the two meetings on Greece (11 and 12)
GDP growth number for the Euro Area in the 4th quarter will be available on Friday
Retail sales in the USA (Thursday) and the inflation report in UK (Thursday)
Industrial production indices in Europe (France, UK, Italy, Euro Area)
Employment numbers for the 4th quarter on France (Friday)