Signals in economics are not something to cheer about

As the summer progresses, the picture becomes increasingly clear. With a number of exceptions, economic indicators point to a weakening. The provisional European purchasing managers' indices for July that were announced this week are heading in the wrong direction. The eurozone composite index that combines industry and services fell to 50,9 from 50,1 in June. It was the second decline in a row. Too bad, because the index had actually risen nicely in the five months prior. We knew that industry has been under pressure for some time, but confidence within the services sector is now also weakening: 51,9 in July, after 52,8 in June.

In brief:

• European purchasing manager indices disappointed in July
• World trade growth is picking up slightly…
• …but the picture in Europe is unfavorable
• US GDP grows faster than expected in the second quarter

In Germany, the purchasing managers' index for manufacturing fell from an already meager 43,5 in June to an alarming 42,6. Only in painful recessions are even lower levels reached. The alternative measure of German business confidence, the Ifo index, fell for the third month in a row in July. In particular, the expectations component, which economists attach above-average value to, took a remarkable dip: from 88,8 in June to 86,9 in July.

In the US, the purchasing managers' indices are much higher, although the index for industry also fell: 49,5 in July compared to 51,6 in June. Strangely enough, UK industrial purchasing managers actually became more optimistic, from 50,9 in June to 51,8 in July.

The eurozone compares unfavorably
The CPB's world trade monitor shows a worrying picture, especially for Europe. Although growth in world trade will pick up slightly up to and including May, certainly not spectacularly, this does not apply to the volume of foreign trade in the euro zone. These figures are quite volatile and are regularly revised quite significantly, so some caution is required with their interpretation. In May, the volume of world trade was more or less unchanged from a year earlier. That was somewhat better than in the previous months. The overall figure conceals major regional differences. The US is posting a creditable +3% year-on-year, as is China. However, the eurozone is at -5% and the UK is even at -9%. In emerging Asia, excluding China, on the other hand, things are increasing at a crescendo: +8%.

Those Asian economies are 'early cyclical', so perhaps we can take some hope from that. What was a bit disappointing was that the export orders received by Taiwanese companies in June fell well short of expectations.

I don't know exactly what is going on with the Dutch consumer, but it doesn't make them any happier. From an all-time low in October 2022, when high inflation scared everyone, consumer confidence has gradually improved. This improvement faltered for a few months in the middle of last year, but the upward trend resumed after August last year. Well, until April that is. Because for May, June and July, CBS reports another deterioration, albeit a small one. Elsewhere in Europe the picture is less negative, even in Germany.

Better
Let me end with a bright spot. According to preliminary figures, the American economy grew faster than expected in the second quarter. Compared to the previous quarter, growth was 0,7%, or, as American statisticians report, 2,8% annualized. (We would be happy with that kind of growth in a whole year...) In the first quarter, growth was 0,4% (or 1,4% annualized). The increase in GDP in the second quarter was broad-based. For example, private consumption contributed 1,6 percentage points to the aforementioned annualized 2,8%, investments in fixed assets 0,6% and government consumption 0,5 percentage points (of which 0,2 percentage points for defense). Companies built up inventories at an accelerated pace, leading to a contribution to GDP growth of as much as 0,8 percentage points. On the other hand, foreign trade made a negative growth contribution of 0,7 percentage points. But actually that is a sign of strength rather than weakness. Imports grew considerably faster than exports.

I can't resist. The picture in the US is better than ours, but there are also weaknesses there. For example, the number of homes sold fell in June. The number of mortgage applications has also fallen again in the last week. Confidence indexes from the Richmond and Kansas Feds fell in July while durable goods orders fell sharply in June. As previously reported, the value of the purchasing managers index in American industry fell in July. This is offset by an increase in this index in the services sector.

Closing
European purchasing managers' indices and other business confidence indices deteriorated in July. That does not seem to be a one-off aberration, but rather the new trend. The figures on foreign trade in the eurozone also do not make people happy. Not that things are going that much better elsewhere, but we do compare remarkably unfavorably.

Although the decline is small, the weakening of Dutch consumer confidence is striking. I do not immediately see a good explanation for this and elsewhere in Europe the picture is less favorable.

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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