Macro Weekly – Where is the follow-through?

by: Han de Jong

  • Confidence indicators showing impressive strength
  • Strength coming through across many economies
  • Hard data lagging behind, but expected to pick up
  • Fed raises rates and expect three more hikes in 2017; they could be right
Macro-Weekly-16-December-2016.pdf (89 KB)

A few months ago I was challenged severely when I argued that the global manufacturing cycle was likely to gain momentum in the months ahead. Looking at recent confidence indicators around the world, I get a big smile on my face and feel I have deserved my turkey and ham, stuffing and sprouts and perhaps a glass of nice wine. But looking at ‘hard’ data, I see I should not get complacent. What the heck is going on?

Impressive data in the US

The most recent crop of high-frequency business confidence data has been excellent and ahead of expectations. This is particularly true for the US. Confidence among small businesses surged in November (rising from 94.9 in October to 98.4), the second highest monthly reading since early 2007. Confidence among home builders also shot up, rising from 63 in November to 70 in December, the highest level since 2005! The Empire State index, measuring business confidence in the district of the New York Fed, rose from 1.5 in November to 9,0 in December, the second highest for the year. The Philly Fed index of business confidence in the district of the Philadelphia Fed jumped from 7.6 in November to 21.5 in December, the highest since 2014 and well above the historical average for this series. Last, the Markit PMI for the manufacturing sector inched higher in December (from 54.1 to 54.2) to reach the highest level since early 2015.

Not too bad elsewhere either

Other countries have seen similar, though perhaps somewhat less overwhelmingly positive confidence data. In the eurozone the ZEW expectations index rose to 18.1 in December, from 15.8 in November, which is good but not hugely impressive. The Markit PMI for the manufacturing sector rose to 54.9 in December, up from 53.7, the fourth consecutive rise and easily the highest level of this series (history for this series in Bloomberg only goes back to early 2014). In Japan also, business confidence has recently been strengthening. The same is true for many other economies, both advanced and emerging.

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Hard data is not confirming the strength in confidence

This pattern of strongly positive confidence indices is unusual and for someone who has, for a while, argued that the manufacturing sector was set to gain momentum it could be reason to feel really good about oneself or even euphoric. Unfortunately, what matters in the real world is not confidence, but actual stuff. Actual stuff is measured in GDP, retail sales, industrial production, etc. The indicator to watch when assessing the relevance of the various confidence indicators for the manufacturing sector is industrial or manufacturing output. This sort of data continues to be very soft. Industrial production in the US has improved somewhat throughout the year, but in October was still 0.6% below last year’s level, while manufacturing output was only up 0.1% in the level achieved in October 2015. Eurozone industrial production was up a modest 0.6% yoy in October, while the number for Japan was a disappointing -1.4%.

The gap must close

So what is going on and what lies ahead? It is not unusual for short-term trends in confidence and hard data to deviate somewhat. But it is unusual for the gap to get very large or persist. The gap that has opened up recently cannot last. So will confidence weaken or will hard data improve? Most likely, we will get a bit of both, but I think the biggest contribution to the closing of the gap will come from stronger output growth. Confidence indicators, particularly in the US, may have been affected by expectations concerning the policy agenda of the next president. But in general, confidence indices should be leading the harder data, though only by a very short period. Stronger output data is also in line with trends that can be witnessed in some emerging economies, where production growth has strengthened somewhat in recent months. In addition, confidence indicators are improving across such a wide range of countries that it would be very surprising if that was just a coincidence.

So overall, I think I can look forward to my Christmas dinner with some optimism that the harder data will follow the recent trend of confidence indicators.

Fed could be right this time

When the US Fed raised interest rates in December last year, their forecast was that four more rate hikes were likely in 2016. We soon took the view that was unlikely and we pencilled in one rate hike at most. And one rate hike was, indeed recently delivered. The Fed also said that three more hikes are expected in 2017. That is up from the two hikes they were expecting earlier and is bang in line with the expectation we have had for some time. Stronger growth, partly as a result of the Trump policy agenda, and modestly higher inflation will justify a gradual further tightening of monetary policy in our view. So this time, we agree with the Fed.



This is the last weekly macro comment for the year. Also on behalf of all my colleagues at ABN AMRO’s Group Economics I would like to thank all our readers for their interest in our work. We hope that our analysis and commentary has been useful. I would like to wish you happy holidays and a healthy and happy 2017.