Macro Weekly – Direction quite clear, except for the US due to hurricanes

by: Han de Jong

  • Eurozone economy humming along nicely
  • Very weak US data at least partly related to Harvey
  • China’s gradual slowdown continues
170915-Macro-Weekly-1.pdf (118 KB)

Reading the tea leaves of monthly economic data releases does not always provide a clear picture of where the global economy is going. Although the week just ended was not full of key data releases, they paint an interesting picture, mostly confirming our views. The eurozone economy is humming along nicely, China’s economy is going through a gradual slowdown while the hurricane season makes it very difficult to gauge what is happening in the US economy.

Eurozone employment growing relatively rapidly

Despite the rise of the euro, the eurozone economy is doing well. Employment growth accelerated a notch to 1.6% yoy in the first quarter this year and kept up that momentum in the second quarter. This is actually the highest growth rate since 2008. July industrial production was up a meagre 0.1% mom, but the year-on-year rate accelerated a little to 3.2%, up from 2.8% in June, but is still well below May’s 4.1%. We must bear in mind here that these numbers are prone to revisions and that the numbers can be erratic over the summer holiday period.

Poor US retail sales, partly due to Harvey

US economic data was generally poor, in particular retail sales and industrial production. Retail sales fell 0.2% mom in August and the data for the previous two months was revised materially lower. This may lead to a small downward revision of the Q2 GDP numbers. More importantly, it makes the prospects for consumption growth in the Q3 GDP numbers troublesome. A key culprit for the decline of sales in August was hurricane Harvey, though the statisticians said they could not isolate and quantify that effect. Auto sales have been weak for some time and that is a drag on sales at large. Excluding cars, retail sales actually still managed to rise by 0.2% mom in August, despite Harvey.


Industrial production also slumps, but business confidence robust

The hurricane also affected other data. Industrial production fell 0.9% mom, while manufacturing shrank 0.3% in August. These are weak numbers and it is impossible to know what the effect of the hurricane has been, we just have to wait and see if September is any better, although the effect of Harvey may have lingered on in September while hurricane Irma must also have had an impact. In contrast to the poor retail sales and industrial production data, the New York Empire State index, which measures business confidence in the district of the New York Fed (so, far away from the hurricanes) declined only marginally in September, at a level indicating robust growth. The business confidence index for small and medium-sized companies nationwide, the NFIB index, inched higher in August, 105.3, up from an already high 105.2 in July. So the hard data and the confidence indices are conflicting. We are a little in the blind here. But so is everyone else, including the Fed. This uncertainty may be another factor for the Fed to hold off committing to early further tightening of monetary policy.

Higher US inflation: a new trend or Harvey?

US inflation has surprised on the downside for most of this year. August brought an abrupt change. The CPI was up 0.4% mom. The question this raises is if the previous six months were a fluke or whether the August number is a bit of a fluke. One number does not make a trend, they say. I have been on the side of the low-inflation believers. And one month of high inflation isn’t going to change that. Looking at the detail, it would appear that Harvey also had an impact here. The cost of ‘lodging away from home’ jumped sharply as did rents. As many people were evacuated before and after Harvey hit, local hotels may have raised their prices as may landlords have done. To what extent that may have affected the national data is, obviously, unclear. Core inflation rose a more subdued 0.2% mom. The difference is largely accounted for by fuel prices which are related to world market prices for oil, but also to refined product scarcity as refineries closed because of Harvey.

While I believe in low inflation for a variety of reasons, largely due to technology impacting markets and in particular the services sector, even I must acknowledge that several factors are pointing at somewhat higher inflation in the US in the period ahead. The weakness of the dollar, higher commodity prices and the tighter labour market all make it likely that the monthly pace of price increases accelerates somewhat in the remainder of the year. However, that also happened last year, so the base effect will keep the year-on-year rates in check.

China’s slowdown

We have long held the (consensus) view that Chinese growth is bound to slow gradually. Q2 data did not confirm that, however. More recent data appears to be more consistent with the gradual slowdown view. Industrial production growth, for example, slowed to 6.0% yoy in August, down from 6.4% in July. Retail sales also slowed somewhat: 10.1% in August versus 10.4% in July. The key question is how fast the slowdown will be and how long it will last.

The 19th National Congress of the Communist Party of China starts on 18 October.This starts a process of significant reshuffling of politicians which will last into 2018. The general view is that president Xi will aim to strengthen his power base and that economic weakness or instability is very unwelcome. As Chinese policymakers generally have a good handle on the economy, we are assuming that the slowdown will continue to be gradual and not lead to disruptive developments.