Today has opened with a bit of a hangover from yesterday. The reason for that is that more than a few were caught out by this release in the afternoon. From Markit.
Flash U.S. Composite Output Index at 50.9 (53.0
in April). 36-month low.
▪ Flash U.S. Services Business Activity Index at
50.9 (53.0 in April). 39-month low.
▪ Flash U.S. Manufacturing PMI at 50.6 (52.6 in
April). 116-month low.
▪ Flash U.S. Manufacturing Output Index at 50.8
(52.7 in April). 35-month low.
Those hit the screens and impacted in two ways. Firstly the size of the drop and then a follow-up punch as they noted when 116 months ago was. The detail provided a further reminder of more troubled times.
The muted rise in output was attributed to softer
demand conditions and subdued growth of new
orders. The rise in new business in May was the
softest recorded since the series began in October
We were ready for this because back on the eighth of this month had noted this.
This is the clearest warning shot we have seen for the US economy. Outright falls in narrow money supply of this magnitude are rare on a monthly basis………Thus as we move through the autumn I now fear a US slow down and another month or so like this would make me fear a sharp slow down.
Moving back to the Markit PMI then they conclude this.
“A decline in the headline ‘flash’ PMI to its lowest for
three years pushes the survey data down to a level
historically consistent with GDP growing at an
annualised rate of just 1.2% in May. Worse may be
to come, as inflows of new business showed the
smallest rise seen this side of the global financial
crisis. Business confidence has meanwhile slumped
to its lowest since at least 2012, causing firms to
tighten their belts, notably in respect to hiring.”
So it looks like the impact of the “trade war” is now impacting the US economy and should it only grow at a quarterly rate of 0.3% it will have a knock-on effect for the rest of the world.
We got two fairly quick responses as bond markets rallied taking the US ten-year Treasury Note to 2.32% as I type this, or if you prefer it has further shifted to suggesting the next move in interest-rates is down. Also commodity prices fell with crude oil leading the pack with falls of 5% for some types and Brent Crude is now a bit over US $68. Dr. Copper has been diagnosing an issue for a while as the recent peak of US $2.99 on the 17th of April is replaced by us $2.69 now.
Fears of a slow down have had a by now familar response.
@Shahinvallee I think a 4% inflation target jointly announced by G3 central banks may be unlikely, but more powerful than worrying about asymmetrical targets or carefully calibrating inflation overshoots ( Former Bank of England policymaker Adam Posen)
Adam is seemingly convinced he can make us richer by er making us poorer. Also Olivier Blanchard is on the case and the emphasis is mine.
Blanchard and Tashiro, however, argue that, in the current economic environment in Japan, primary deficits may be needed for a long time, because they may be the best tool to sustain demand and output, alleviate the burden on monetary policy, and increase future output.
Last time Olivier Blanchard was involved in primary deficits the Greek economy collapsed. That is an odd feature of economics as who in the real world would rush to travel on a new plane by the 737 Max designers? Also these proposals fail my general critic which is why do we always need more stimulus? Surely it would be better to address why we need it as in a cure rather than ongoing treatment?
UK Retail Sales
These were strong again as we note below although it began with what in sporting terms would be called a head fake.
The quantity bought was flat (0.0%) in April 2019 when compared with the previous month, with growths in clothing, non-store retailing and fuel offset by falls in all other main sectors.
However this represented quite a surge on last year.
When compared with the previous year, the quantity bought in April 2019 increased by 5.2%, with growth across all sectors except household goods, which fell by 4.5%.
As you can see the numbers were strong and if we stockpiled anything ( after all many economists and much of the media claimed we were) then household goods seems an odd item. As to the more recent trend overall it has been strong too.
In contrast, from January 2019 to April 2019 the three-month on three-month index has shown strong growth…….In the three months to April 2019, the quantity of goods bought (volume) in retail sales increased by 1.8% when compared with the previous three months, with strong growth in non-store retailing, which reached a record high of 9.4%.
This brings one of my main themes into play as well as providing insight into an curious current episode. The theme that I established in January 2015 has worked again.
Both the amount spent and quantity bought in the retail industry showed growth of 5.5% and 5.2% respectively in April 2019 when compared with a year earlier.
What that shows us is that an inflation rate of 0.3% has led to strong retail sales growth one more time. That is more mud in the eye for inflation fanatics like Adam Posen who continue to prescribe more of it as a cure all for the economy. Actually there is so much evidence to the reverse now it is mud in both eyes. The low retail sales inflation we are seeing combined with annual wages growth of 3% or so means strong real wages growth in this area and therefore strong numbers.
Why are retailers doing so badly then?
This week has seen various problems for the retail sector. Here is the Guardian on Marks and Spencer.
Pretax profits were less than £85m – on sales of £10.4bn – after £440m of one-off costs, about half of which relate to the store closure programme………Marks & Spencer is stepping up its retreat from the high street by closing a further 20 of its full-line stores, which sell clothing and food under one roof.
Also the empire of Phillip Green has hit trouble this week or perhaps I should say more trouble, plus in a related piece of news Jamie Oliver’s restaurant chain bit the dust. So how can retail sales be so strong but retailing so week?
- The low retail inflation number is good for consumers but must be squeezing retailers margins
- “with strong growth in non-store retailing, which reached a record high of 9.4%.”
So not only are margins squeezed but we continue to shift online.
In April 2019, online retailing accounted for 18.7% of total retailing compared with 17.7% in April 2018, with an overall growth of 10.1% when compared with the same month a year earlier.
Or as Glen Frey put it.
The heat is on, on the street
Inside your head, on every beat
And the beat’s so loud, deep inside
The pressure’s high, just to stay alive
‘Cause the heat is on
As ever a lot is happening at once. We see more and more signs of a global slow down which to my mind should lead to us asking “how did I get here?”. Instead the same old crew repeat the same failed remedies and so rarely get questions. In the detail we may see something of a pivot towards the Euro area relative to the US as the monetary data has been better the last couple of months.
Returning to the UK we are likely to be grateful yet again for the UK consumer who seems to have inexhaustible desire and appetite. Of course it is not a free lunch as it poses questions for the trade figures. Also if we sum up the retail sector is reducing inflation but even with it we do not have that much economic growth. That no doubt explains why in spite of the rhetoric from Mark Carney and Forward Guidance from the Bank of England about higher interest-rates those trading UK Gilts do not believe it. That is because the UK two-year yield at 0.66% and the five-year yield at 0.72% are below his Bank Rate of 0.75% and suggesting cuts and not rises.
Also let me wish soon to be former PM Theresa May well as whatever one may think of her term it is nearly over and we all need to move on.