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Yesterday at 17:00 -Hon de Zhang
Confidence in Chinese entrepreneurs in this sector is further declining, as is consumer confidence in the United States. American entrepreneurs continue to invest, however Fed boss Jerome Powell called high inflation ‘disappointing’. What does it mean if two key indicators of the world economy have been declining for months?
The big economic news this week offered something for everyone. It is an unusual combination of clearly positive and clearly less positive signals. Since I want to end up with a positive note, I will start with less positive. Please wait until the last.
According to the NBS series, Chinese business confidence in the manufacturing sector fell again in September: against 49.6 and 50.1 in August. This is the sixth consecutive monthly decline. If you exclude last year’s fall due to the epidemic, the chart shows that optimism according to this index is lower than the average of recent years.
Although business confidence in the service sector recovered from 47.5 in August to 53.2 in September, it was mainly due to the reversal of previously implemented regulations in response to corona infections. Confidence in the service sector is also clearly below the 2016-19 level.
Confidence is historically high
U.S. consumer confidence also plummeted in September. Confidence fell for the third consecutive month, to 109.3 in September from 115.2 in August, according to the Convention Board Index. In the report, the Convention Board writes that the absolute level of consumer confidence is even higher from a historical perspective. But the decline over the past three months has been extraordinary. Except for last year, we have to go back to 2008 to find a stronger three-month decline than the current one. The report adds that the delta variation of the corona virus has been a factor in weakening confidence in recent months.
This also applies to the labor market in the United States. It’s definitely recovering, but it seems to be leveling off. During the week of September 24, 362,000 new unemployment benefits were recorded, compared to 351,000 in the previous week. Before the epidemic, this number was over 200,000.
Business confidence is slightly lower than at higher levels and in many other countries. In our home country, the NEVI Purchasing Managers’ Index fell to 62.0 in September from 65.8 in August for the fourth month in a row. While this level is still historically high, the monthly decline is quite significant.
In Korea, for example, business confidence in the industry has weakened. It was the third month in a row. Also in the United States, the so-called Chicago BMI fell from 66.8 in August to 64.7 in September. The latter is still at a high level.
Continue to invest positively
For me, the main positive macro news this week is that American entrepreneurs continue to invest. The durable goods orders report measures how much money in the capital goods was sent by the manufacturers (excluding security and aircraft).
That monthly series is a good reflection of the investment activity of the companies. In August this amount increased by 0.7% compared to July. Although the year-on-year increase is declining (11.2% in July and 13.2% and 22.1% in April), we need to be aware of the underlying effects. The following chart shows the growth in (current) dollars. It paints a very positive picture.
Accelerated European monetary growth
Another positive development is that monetary growth in the euro zone accelerated slightly in August. M1 (notes and currencies) growth increased from 10.9% in July to 11.1% in August, M3 (including M1 deposits and money market funds) to 7.6% in July and 7.9% in August. Explaining such growth is not easy.
Many economists see the M1 as a good indicator of short-term spending, however inflation should be taken into account. Coincidentally, the relatively comfortable financial position of companies seems to be mainly behind the acceleration of monetary growth in August. Credit growth is actually slightly lower.
Some other positive statistics related to consumer confidence in the eurozone. It improved slightly in Germany and France in September. The ‘Economic Sense Index’ compiled by the European Commission for the Eurozone rose slightly in September, although the increase was minimal: 117.8 against 117.6 in August.
The debate over inflation continues
Meanwhile, it is clear that higher inflation is temporary than some central bankers announced some time ago. Central Bank chairman Jerome Powell said earlier this week that high inflation was “disappointing”. He also noted that the temporary factors that keep inflation high could continue until next summer.
In the euro area, inflation has now risen to 3.4% in September. Excluding food, energy, alcohol and tobacco, the so-called core inflation rose to 1.9% from 1.6% in August. It should be noted that energy plays an important role. The energy in the inflation basket weighs almost 10% and prices were 17% higher in September than a year ago.
Last year’s German VAT cut also distorted the image. In the second half of 2020, VAT in our eastern neighbors was temporarily reduced by 3 percentage points. As of this year, that reduction has been reversed. But this means that inflation figures are now somewhat higher, as year-on-year figures are being compared to the period when VAT was lower.
If you look in more detail, you can see that inflation for services (42% of the basket) is recovering at the same pace as it was before the epidemic last year. With the exception of energy (27% of the basket), inflation for industrial goods is significant. Before infection, it was 0% to 0.5%. Inflation is now above 2%. This seems to be the result of logistics disorders in the world. Whose guess is how long this will last.
The pressing questions about the world economy and inflation remain unanswered this week. Both Chinese industry and American consumers are important to the world economy. Confidence indicators for both have been falling for months. If this is mainly due to the delta variation in the United States, confidence will be restored when the delta variation comes under control. There were also some important positive signs this week. Thus we can not get more than saying ‘the arbitral tribunal is still out’ about the direction of the economy in the coming months and quarters.
According to Powell, high inflation is ‘disappointing’. In the coming months we will hear how this affects the decisions of various central banks. It seems to me that the arguments should be very careful in reducing bond purchases … if they are not already …
Hon de Zhang
Hon De Jong is a former chief economist at ABN Amro and now an economist living at PNR Newsradio. His comments can be found at Crystalcleare Economics.nl
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