Confidence in China and US has been falling for several months

The confidence of Chinese entrepreneurs in the industry is declining further, as is consumer confidence in the United States. Yet American entrepreneurs continue to invest, although Fed boss Jerome Powell calls the high inflation 'frustrating'. What does this mean if two key indicators of the global economy have been falling for several months?

Macroeconomic news this week provided something for everyone. It was a rather unusual mix of clearly positive and clearly less positive signals. Since I like to end on a positive note, I'll start with the less positive. Please hold on until the end.

less positive
Chinese business confidence in the manufacturing industry fell again in September according to NBS series: 49,6 versus 50,1 in August. It was the sixth consecutive monthly decline. The chart shows that confidence according to this index has fallen well below the average in recent years, if you exclude last year's plunge due to the pandemic.

While business confidence in the service sector recovered from 47,5 in August to 53,2 in September, that was mainly due to the reversal of restrictions previously implemented in response to the corona infections. Confidence in the services sector is also clearly below the 2016-19 level.

Confidence historically high
US consumer confidence also fell in September. According to the Conference Board's index, confidence fell for the third straight month, from 115,2 in August to 109,3 in September. In the statement, the Conference Board wrote that the absolute level of consumer confidence is still high from a historical perspective. But also a decline like the one that has occurred in the last three months is quite unusual. Other than last year, we have to go back to 2008 to find a three-month decline that was stronger than the current one. The statement further states that the delta variant of the coronavirus is responsible for the weakening of confidence in recent months.

This also applies to the labor market in the US. It is certainly recovering, but this seems to be leveling off. In the week of September 24, 362.000 new unemployment benefits were registered, compared to 351.000 in the previous week. Before the pandemic, the number was just over 200.000.

Business confidence also declined slightly in various other countries, albeit from a high level. In our own country, the NEVI purchasing managers index fell for the fourth straight month from 65,8 in August to 62,0 in September. Although the level is still historically high, the monthly decline is quite significant.

Also in Korea, for example, business confidence in the industry weakened. That was the third month in a row. And in the US, the so-called Chicago PMI fell from 66,8 in August to 64,7 in September. The latter is also still a high level.

Continue to invest positively
As far as I'm concerned, the main positive macro news this week was that US entrepreneurs continue to invest. Durable goods orders reporting includes a series that measures how much money in capital goods has been shipped by producers (excluding defense and aircraft).

That monthly series is a very good reflection of the investment activity of companies. In August, this amount increased by 0,7% compared to July. Although the year-on-year increase is slowing (11,7% against 13,2% in July and a peak of 22,1% in April), we need to be aware of base effects. The following chart shows the development in (current) dollars. It paints a very positive picture.

Accelerated European money growth
Another positive development is that money growth in the eurozone accelerated slightly in August. Growth in M1 (notes and coins) accelerated from 10,9% yoy in July to 11,1% in August and M3 (M1 including deposits and money market funds) from 7,6% in July to 7,9% in August. It is not easy to interpret such a development.

Many economists see M1 as a good indicator of short-term spending, although inflation must be taken into account. It also seems that a somewhat more comfortable financial position of companies is behind the acceleration of money growth in August. Loan growth, on the other hand, declined slightly.

Some other positive data related to consumer confidence in the eurozone. This improved slightly in September in both Germany and France. The 'Economic Sentiment Index' compiled by the European Commission for the eurozone also rose slightly in September, although the increase was minimal: 117,8 against 117,6 in August.

Discussion on inflation continues
Meanwhile, it is becoming clear that higher inflation is less temporary than many central bankers proclaimed some time ago. Fed chief Jerome Powell called high inflation "frustrating" earlier this week. He also indicated that the temporary factors that keep inflation high may continue until next summer.

In the eurozone, inflation has now risen to 3,4% year-on-year in September. Excluding food, energy, alcohol and tobacco, so-called core inflation, picked up to 1,9% from 1,6% in August. It should be noted that energy plays an important role. Energy has a weight of almost 10% in the inflation basket and prices were more than 17% higher in September than a year earlier.

Last year's German VAT cut also distorts the picture. In the second half of 2020, the VAT at our eastern neighbors was temporarily reduced by 3 percentage points. As of this year, that reduction has been reversed. But it does mean that inflation figures are now somewhat higher, because the year-on-year figures are compared with a period when VAT was lower.

If you look in more detail, you can see that inflation for services (42% of the basket) has recovered to the pre-pandemic pace after a dip last year. Also notable is the inflation for industrial goods, excluding energy (27% of the basket). Before the pandemic, it was between 0% and 0,5%. Inflation has now risen to above 2%. This seems to be the result of the logistical disruptions in the world. How long this will last is anybody's guess.

Closing
Pressing questions about the global economy and inflation have not been answered this week. The Chinese industry and the American consumer are both important for the global economy. Confidence indicators for both have been falling for several months. If this is mainly due to the delta variant in the US, then confidence will recover when the delta variant is brought under control. There were also some important positive signs this week. That way we don't get much further than to say that 'the jury is still out' as to the direction of the economy in the coming months and quarters.

The high inflation is 'frustrating' according to Powell. We will hear in the coming months how this affects the decisions of various central banks. It seems to me that the arguments to be very careful with reducing bond purchases are getting weaker…if they weren't already…

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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