Chinese money trends suggesting moderate economic expansion

Posted on Wednesday, November 15, 2017 at 11:40AM by Registered CommenterSimon Ward | CommentsPost a Comment

Annual growth of Chinese narrow money – as measured by the true M1 aggregate* calculated here – peaked at 22.1% in August 2016. In line with the normal historical pattern, the peak in narrow money growth was followed by peaks in annual house price inflation (November 2016), industrial profits growth (January / February 2017) and producer price inflation (February 2017) – see first chart.

Annual narrow money growth fell further to 11.6% last month, the lowest since 2015. House price momentum, profits growth and producer price inflation should continue to soften into early 2018.

The issue for analysts is whether the money / credit slowdown signals a normalisation of economic growth and inflation after a period of buoyancy or rising risk of a “hard landing” scenario. Current narrow money trends still suggest the former.

The fall in annual narrow money growth mainly reflects a step-down in the monthly trend in late 2016 / early 2017. The three-month rate of increase has moved sideways since end-2016, suggesting that annual growth will level off soon – second chart.

Annual and six-month narrow money growth remain at levels historically consistent with respectable nominal GDP expansion. Broad money trends are weaker but six-month growth of the preferred measure here, i.e. M2 excluding financial sector deposits but including bank bonds, has recovered since June and is well above the low reached in late 2014, when a “hard landing” was a serious risk – third chart.

After tightening policy during the first half of 2016, the authorities are maintaining a restrictive stance but may ease off in early 2018 as the housing market continues to soften and producer prices slow. Further monetary weakness would be concerning but the current signal remains moderately positive.

*True M1 = currency in circulation plus demand deposits of corporations, government organisations and households. The official M1 measure omits household deposits.

US worker shortage suggesting margin squeeze

Posted on Friday, November 10, 2017 at 09:57AM by Registered CommenterSimon Ward | CommentsPost a Comment

US unemployment of 6.52 million in October has almost converged with the number of job openings (vacancies) in the economy, of 6.09 million in September. If the unemployed had the right skills and / or were in the right location, almost all would be in jobs. This is a reasonable definition of “full employment”.

The unemployment rate of 4.1% (4.07% before rounding) compares with a job openings rate of 4.0% (3.98%)*. The gap between the unemployment and job openings rates has fallen below 0.5 percentage points (pp) on only four occasions since the early 1950s – 1955, 1965, 1972 and 1999**. All four instances were followed by a rise in unit labour cost growth. Between the month when the gap fell below 0.5 pp and four quarters later, annual growth of non-farm unit labour costs rose by 6.7 pp, 3.6 pp, 5.0 pp and 2.7 pp respectively.

In 1955, 1972 and 1999, the unemployment rate converged with the job openings rate but did not fall below it. The economy subsequently weakened, the gap rewidened and the rise in unit labour growth was reversed.

In 1965, by contrast, the unemployment rate fell well beneath the job openings rate and a negative gap was sustained through 1970. Annual unit labour cost growth moved up from around zero in 1964-65 to 4% over 1966-68, with a further ratchet higher to 7% in 1969 – see first chart.

Developments since 2012 echo the first half of the 1960s, with annual unit labour cost growth remaining weak despite a steady narrowing of the unemployment rate-job openings rate gap – second chart. The gap fell below 0.5 pp in April 2017, suggesting – based on the historical experience – a rise in unit labour cost growth by mid-2018.

Faster unit labour cost growth would put upward pressure on (core) inflation and downward pressure on profit margins. Either would be negative for markets but the balance would affect the relative attraction of equities and Treasuries. A scenario in which margins took more of the strain, for example, would imply deteriorating economic prospects and rising recession risk, suggesting support for Treasuries despite a near-term inflation increase. Margins have fallen back since 2014 but remain elevated by historical standards – third chart.

*Unemployment rate = unemployment as percentage of employment plus unemployment. Job openings rate = job openings as percentage of employment plus job openings.
**Job openings data from December 2000 from Bureau of Labor Statistics; earlier data based on composite (i.e. print plus online) help-wanted series estimated by San Francisco Fed economist Regis Barnichon.

US bank credit loosening offsetting Fed restraint

Posted on Wednesday, November 8, 2017 at 11:56AM by Registered CommenterSimon Ward | CommentsPost a Comment

Posts in the spring and summer suggested that US economic growth would pick up into early 2018 based on 1) a rise in six-month real narrow money growth into August, 2) an expected upswing in the Kitchin stockbuilding cycle into the first half of 2018 and 3) a loosening of bank credit supply as the negative impact of a temporary tightening of funding markets in 2016 reversed.

The forecast of a positive impulse from bank credit supply is supported by the Fed’s October survey of senior loan officers. An average of the net percentages of banks tightening credit standards across various loan categories (commercial and industrial, commercial real estate, residential mortgages and consumer) fell further, consistent with rising near-term GDP momentum – see first chart.

As previously explained, looser bank credit is temporarily masking the negative economic impact of earlier Fed rate hikes. The danger is that apparent economic resilience will cause the Fed to overtighten over the next six to 12 months, laying the foundation for a recession in 2019-20.

The suggestion that the stockbuilding cycle remains positive for near-term economic prospects, following a 0.7 percentage point contribution to third-quarter GDP expansion of 3.0% annualised, is supported by a further decline in the ratio of inventories to sales in the three months to end-September – second chart.

Six-month real narrow money growth fell back sharply in September, suggesting that economic momentum will peak in early 2018. Weekly data through 23 October, however, indicate a partial rebound last month – monetary trends are not yet giving grounds for pessimism about economic prospects for later in 2018.

UK money trends signalling stable outlook

Posted on Wednesday, November 1, 2017 at 12:36PM by Registered CommenterSimon Ward | CommentsPost a Comment

UK monetary trends suggest modest but stable economic growth. Six-month growth of real narrow money – as measured by non-financial M1 deflated by consumer prices (seasonally adjusted) – has recovered since April 2017 but remains lower than over 2013-16. Real broad money trends are similarly subdued – see first chart*.

Corporate narrow money developments are of particular interest at present: any Brexit-related cut-back in investment or shift of activity overseas should be signalled by a slowdown or contraction in real M1 holdings of private non-financial corporations (PNFCs). Growth, so far, is holding steady – second chart.

Some analysts have expressed alarm about weak household broad money trends: annual growth in household M4 fell from 6.8% to 2.9% between September 2016 and September 2017. A significant portion of this decline, however, reflects households switching out of bank and building society time deposits (including retail bonds) into investment funds and National Savings products. Retail sales of investment funds and inflows to National Savings totalled an estimated £38 billion in the 12 months to September, equivalent to 2.8% of household M4, compared with £10 billion or 0.8% in the prior 12 months.

The six-month rate of change of household real M1 – a better guide to consumer spending intentions – fell sharply in late 2016 / early 2017 but has remained positive and has recovered modestly from an April low. Household real M1 contracted ahead of consumer spending weakness in 2010-11.

The MPC was wrong to ease policy in August 2016 against a backdrop of then-strong monetary growth. Tomorrow’s expected Bank rate increase represents a partial reversal of that mistake: other elements of the easing package (i.e. the higher stock of QE and the still-expanding term funding scheme) remain in place. Current monetary trends suggest that the MPC should be cautious about signalling further rate hikes.

*Non-financial = held by households and private non-financial corporations. The M4+ measure shown in the chart includes foreign currency deposits and National Savings.

Global economic surprises strong but approaching peak

Posted on Tuesday, October 31, 2017 at 11:35AM by Registered CommenterSimon Ward | CommentsPost a Comment

Posts earlier in the year argued, based on narrow money trends, that the global economy would lose some momentum over the summer before reaccelerating in late 2017, led by the US. This forecast is on track, although the summer slowdown was milder than expected. Current monetary trends suggest another momentum peak in early 2018.

Changes in economic momentum are reflected in activity news surprise indices calculated by Citigroup and others. The Citigroup index covering the G10 developed economies peaked in January / March 2017 at its strongest level since 2011, turned negative between June and August but has surged since mid-September. The EM index has followed a similar profile but has been less volatile – first chart.

These movements were foreshadowed by monetary trends. The shift from positive to negative surprises over the summer followed a sharp fall in global six-month real narrow money growth between August 2016 and February 2017. Recent strong economic news, meanwhile, was signalled by a rebound in real money growth into June 2017 – second chart.

The surge in the G10 surprise index since mid-September has been driven by US economic data – third chart. US economic strength is consistent with a pick-up in real narrow money growth into August, discussed in several posts over the spring and summer. A post in June argued that the US surprise index would return to positive territory by the fourth quarter, converging with or overtaking the Euroland index – this remains likely.

June appears to have marked another peak in global real narrow money growth, which edged lower in July and August before falling sharply in September. The lead time between monetary trends and the surprise indices is variable but this suggests that economic news strength will fade in early 2018. Real money growth is around the middle of its range in recent years so is not yet signalling economic weakness.