Three That Matter from Last Week's Shocks & Surprises

I think the three most important Shocks & Surprises from last week's data were these:

1. The 1.2% mom fall in US Industrial Production

2. No fewer than three  surveys indicating a major rebound of US economic confidence in September, plus another finding the same thing for August. 

3. Japan's Y625.4bn July current account surplus - far bigger than expected, but only a flea-bite on what's needed to fund the fiscal deficit. 

US Aug Industrial Production: The 1.2% mom fall in output during August was the worst result since March 09 – but the size of the fall itself is not the main feature. The sharpest falls were in utilities (down 3.6%) and mining (down 1.8%), but manufacturing contracted 0.7% mom.  Output of consumer goods fell 1.2%, materials fell 1.5%, industrial supplies fell 1.3% and business equipment fell 0.2%.Worst hit were vehicles (down 4%), but apparel/leather, plastic and rubber products, metals products and machinery also suffered. 

The fall didn’t come out of the blue, but rather reflects an attempt to adjust output to the lower levels of demand seen in recent months. In the six months to July, output momentum has been 0.26SDs above trend, but sales have been 0.15SDs below trend, exports have been 0.07SDs below trend, and inventories have been only 0.08SDs above trend. August’s weakness reflected an attempt to move back towards short-term equilibrium. Absent a sharp pick-up in domestic or foreign demand, or a vigorous re-inventorying program, the short-term adjustment in output is unlikely to have been completed.

Here's the chart which summarizes the situation: note that the last two times the momentum of output has significantly outstripped sales and inventories, without a compensating surge in exports, the industrial cycle slowed sharply. That's the threat in August's data, and it is repeated again in today's Empire Manufacturing Survey shocker - the first glimpse we've got of conditions in September.

2. US Sept Economic Confidence: If industrial data for August was shockingly poor, no fewer than four surveys found evidence of a major unexpected bounced in economic confidence: three for September, one for August. The chart amalgamates the three for September: in aggregate these were the most bullish readings since mid-2007. The three are: i)the University of Michigan’s prelim consumer confidence index, which was the strongest since Oct 2007; ii) the RBC Consumer Outlook index, which recorded its highest reading since the end of 2007; iii)  IBC/TIPP Economic Optimism index, which was the best since January 2011. 

The three indexes didn’t agree on why the US had cheered up so suddenly – Michigan and IBC/TIPP found expectations about the economy had improved whilst current conditions were stable or even deteriorating; RBC found the reverse. In addition, the NIFB Small Business Optimism Index’s August survey also recorded a recovery from recent lows.  

If US economic optimism is indeed recovering from the 2Q ‘soft patch’ it is important economic news, because the slowdown so far this year has been driven by a largely inexplicable rise in the private sector savings surplus, which has eroded domestic demand. In short, improved confidence could allow for a reversal of that trend and a rapid snap-back in domestic 

demand.

  

3. Japan July Current Account: What will it take to preserve Japan’s private sector savings surplus? July’s Y625.4bn current account surplus was sharply higher than expected, mainly reflecting a jump in the international income surplus to Y1,442bn, from Y580bn in June. But as the chart shows, even this surprise made no dent in the current rapid erosion of Japan’s savings surplus. During Jan-July, Japan’s entire private sector savings surplus has come to just Y1.77tr, whilst the amount of JRBs in issuance has risen by Y19.93tr. Evidently private cashflows alone are no longer supporting the market, but during the same period BOJ’s net holdings rose by Y8.32tr.