- For
industrial momentum, the ordering is US, China, Eurozone, Japan
- For domestic demand,
the ordering is US, China & Japan (tied), Eurozone
- Outliers & Likely Corrections: Industrial and domestic demand momentum tend eventually to balance. On that basis, expect: i)
vulnerability in Eurozone industrial momentum, and ii) recovery of Japanese
industrial momentum.
So which of the world’s major economies has the most
positive momentum, and in what way? I
compile momentum indicators for the US, the Eurozone, China and Japan on a
monthly basis, making separate indicators for the industrial economy and
domestic demand. Where possible, the industrial economy indicator tracks
production, exports (both local currency value and volume), inventory/shipment ratios and capacity
utilization. Where possible, the
domestic demand indicator takes in retail sales, auto sale, employment and
wages. In both cases, the composition will alter slightly according to the
availability of monthly data. For each item of data, I measure the deflection
of the month’s data from seasonal trends, and express the result as a number of
standard deviations from the average error. Expressing the result as a number
of standard deviations allows me to take a simple average of the data I’m
measuring. Finally, I take the 6ma as
defining the underlying trend momentum.
Industrial Momentum
Taking the industrial economy first, we can compare the 6m
momentum trends. However, at this point, it’s worth emphasising that what’s
being measured is changes in momentum relative to each country’s individual
experience of the past decade, not absolute performance. Thus US industrial output
may be growing by 3.5% yoy whilst China’s is growing by 8.9%, but the underlying
momentum change may be (is) more positive in the US.
On that basis, the indicators are pretty unambiguous: the US
has the most positive underlying industrial momentum, followed by China, then the
Eurozone and lastly Japan. In absolute
terms, both the US and China are gaining momentum, whilst Eurozone and Japan
are losing momentum. The leadership of the US is likely to be extended in March’s
data, with today’s data showing industrial production up 0.4% mom sa (0.5SDs
above trend) and capacity utilization also rising further to 78.5% (1SD above
trend).
Domestic Demand
Momentum
For domestic demand, the picture is slightly different, and mostly
tells a far more encouraging story. What’s not different is that the US plainly
enjoys the most positive domestic demand momentum of these economies, and has
does almost continuously since 1Q2011.
But since August last year, the improvement in the US momentum trend has found
close echoes in both China and (surprisingly) Japan.
The improvement (relative to their recent
experience) is almost identical for both
China and Japan – it is only fractional, but has been sustained now for the
past four to five months.
Finally, the charts confirm the Eurozone as a serious outlier,
with domestic demand losing momentum for the past two years with no sign at all
of any recovery, hampered by an unemployment rate which has risen almost
uninterruptedly from 7.4% at the start of 2008 to 12% now. Whilst
the other major economies can be seen to
have their own cyclical patterns, and can also be seen to respond to other
economies’ cyclical fluctuations, there is no similar pattern in Eurozone domestic
demand – rather, we have a continuous erosion of demand momentum. Unlike the
rest of the world, the Eurozone chart suggests
Depression not cyclical recession.
Imbalance and Likely
Corrections
Finally, it is worth considering the difference between
industrial momentum and domestic demand in each economy, on the basis that over
time one would not expect industrial momentum to differ much from domestic
demand momentum (and vice versa), in much the same way as one would not expect
supply to differ that much, over time, from demand. Where large deviations between the two occur,
we might expect a tendency for them to reconnect – for example, if industrial
momentum was sharply more positive than domestic demand, we might expect either
industrial momentum to slow, or domestic demand momentum to accelerate.
The following chart, then, simply looks at 6m industrial
momentum minus 6m domestic demand momentum. Where the line is positive, industrial momentum is greater than domestic
demand; where negative industrial momentum is not keeping up with domestic
demand momentum. The first thing to
notice is that both the US and China are roughly balanced. Second, for the last three years Eurozone
industrial demand has run persistently stronger than domestic demand momentum
(even though since 2008, the difference has averaged zero). One would continue to expect either industrial
momentum or domestic demand momentum to
change trend in order to resolve this disequilibrium. Personally, I think this suggests latent
vulnerability in Eurozone industrial momentum.
Third, in Japan domestic demand momentum has survived better than
industrial momentum over the last year. Japanese consumer confidence indicators
tells that no abrupt collapse in domestic demand is anticipated: if so, these
are grounds for expecting an upturn in Japanes industrial momentum in the short to
medium term.
