Inflation rises modestly, production could rise sharply

Dutch inflation is increasing modestly. European production figures for February are disappointing, but a significant improvement may be on the horizon. While the US economy is starting to sparkle.

Inflation in our country has now risen to 1,9% year-on-year in March, slightly more than 1,8% in February. The CBS also reports that an estimate has been made for 6% of the index, because no actual measurement is possible due to the restrictions on public life. This applies, for example, to foreign package holidays.

We now hear anecdotal stories that domestic holiday accommodations have become a lot more expensive. It is possible that inflation will get a boost when the components that are currently difficult to measure are available again. Given the inflation 'in the pipeline' (mainly factory prices), the inflation figure in March is not too bad for me. Fuel, energy and clothing in particular became more expensive.

But yes, the oil price in March averaged USD $65,65 against USD $34,38 a year earlier, according to CBS. Although the dollar is cheaper now than a year ago, this implies an increase in euros of more than 70%.

Weak European production: logistics or the weather?
Industrial production fell in February in several European countries. In our own country, the decrease was 2,5% compared to January, in Germany 1,6% and in France even 4,7%. These figures are in stark contrast to the various indices of business confidence. The question is what exactly is going on here.

There are 2 possibilities. First, Europe was hit by severe winter weather in February. This can temporarily depress production. It is also possible that the logistical disruptions in the world limit production. Of course, a combination is also a possibility. It is not clear what the main cause is.

The following picture shows that the improvement in production, measured by the year-on-year comparison, has been stalling in our country for 2 months. From here on, things go a lot better with this series, but that is primarily a basic effect because production took a hit in March last year.

In Germany, a remarkable difference has recently emerged between the growth of industrial orders and production. That process has been going on for a while, as the following chart shows, and it seems to indicate that logistical disruptions are hampering production. But what's in the barrel doesn't acidify, so that production will come about at some point. Unless orders are canceled of course if the delivery takes too long.

The February figures are also particularly interesting. The year-on-year change in orders improved, while that of production deteriorated. Now there is always a fair amount of noise in these numbers, but the divergent movement of the two series in February suggests that the winter weather in February was a significant factor after all.

For the next picture, I've subtracted the indices (not the growth rates) of orders and production. The average over this period is close to 0, which is also what you would expect if you assume that orders lead to production. The chart shows that orders fall faster than production when a recession hits. And that makes sense.

The reverse applies to recovery periods, even then orders are ahead of production, but of course it goes up. The graph shows how strongly orders have outpaced production. As far as I'm concerned, it also applies here that there is quite a bit 'in the barrel'. If that does not turn sour, production will have to catch up with orders in the course of the year. So there is really a very strong growth in production, that is (hardly) possible.

Life in the American economy
Signs of a cyclical recovery in the US are (even) more convincing than in Europe. I dare say that the American economy is starting to sparkle. This is partly caused by the various support packages, but the point here is not to pass judgment on those packages, but only to analyze the economic situation.

A year ago, economists at the New York Fed developed a weekly measure of economic growth (year-over-year) called the Weekly Economic Index. It has skyrocketed in recent weeks. According to the latest observation, which concerns the first week of April, the year-on-year economic growth is 8,1%.

That figure will rise significantly in the coming weeks. After all, this is a basic effect. In the first week of April last year, this index stood at -7,0%. That recent +8,1% suggests that US GDP has now made up for the full loss from a year earlier.

If you follow the American economy, you regularly look at the sale of new 'light trucks', a segment of vehicles that is much smaller in Europe. The Americans have those beautiful 'pick-up trucks', we have 'vans'. The sales figures of those 'light trucks' usually give interesting signals about the economy. If there is an increase, the economy will pick up. The next picture shows that those sales are recovering quite well. Here the figures are up to and including March.

The picture also shows how much sales fell when the pandemic broke out. In the next picture I've taken the same series, but showing a total over 12-month periods. So the most recent observation is for total sales from April 2020 to March 2021. That probably gives an impression of the potential catch-up demand that we can still expect. Whether we will quickly and completely make up for the entire loss of sales over the last 12 months, I dare not say. However, the potential catch-up demand seems significant to me. I am inclined to expect significant further growth in the coming months.

This also translates into the labor market. The US Department of Labor publishes monthly results of the Job Openings and Labor Turnover Survey (JOLTS). During the pandemic, the number of unfilled vacancies naturally fell sharply. However, recovery came quickly. During the second part of 2020, the improvement stopped, but in recent months there has been a strong increase again. You can only draw one conclusion from this: the American labor market is starting to get pretty lively.

Hans de Jong

Han de Jong is a former chief economist at ABN Amro and now a resident economist at BNR Nieuwsradio, among others. His comments can also be found on Crystalcleareconomics.nl

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