3 Numbers to Watch: EU CPI, US NY Fed Index, industrial output
The hard-data support for the Eurozone recovery remains thin at this point, and so today’s revised number on inflation for August will be closely watched for renewed signs of disinflation/deflation. Later, an update on the NY Fed Index offers a new clue for handicapping the outlook for manufacturing in the US, followed by the August release on US industrial production.
EU Consumer Price Index (09:00 GMT) Today’s revision to last month’s flash estimate of August inflation is worth reviewing in the wake of disappointing big-picture economic news for the Eurozone so far in September. Last week we learned that industrial production slumped quite a bit more than expected in July. Even worse, the decline was especially deep in Germany. It doesn’t help to see that Eurostat’s revised estimate of second-quarter employment remained stuck in slightly negative territory. Retail sales fared better, posting a slight advance for July, although the growth in spending fell short of expectations and the news came with a downward revision for June’s red ink.
It’s fair to say that the hard data is still mixed, at best, for arguing that Europe has broken free of recession, as implied by the return of growth in the second-quarter GDP report. No wonder that Mario Draghi, president of the European Central Bank, recently tried to dampen expectations on the macro outlook. “I am very, very cautious about the recovery. I cannot share any enthusiasm,” he said in a press conference earlier this month.
Given this backdrop, the sight of inflation’s annual rate slipping to 1.3 percent in the flash estimate for August from 1.6 percent in July isn’t encouraging. Perhaps it’s just a temporary soft patch. We’ll know more after today’s deeper read on consumer prices in August. Meanwhile, FocusEconomics reports that its consensus forecast for Eurozone inflation still averages 1.5 percent, which implies that the latest bout of disinflation isn’t a sign of deeper troubles down the road. But even if we see today’s update on headline inflation match the flash estimate, which is likely, there's still a lot of uncertainty for the Eurozone until the hard numbers tell us otherwise.
US Empire State Manufacturing Survey (12:30 GMT) Manufacturing activity has improved in recent months. That’s the message in both regional surveys and a national measure of the mood in this sector, according to the ISM Manufacturing Index. But after considering the sluggish pace of growth in the August updates for retail sales and payrolls, the bulls at this point can’t afford to lose another key cyclical metric to the demons of deceleration.
The good news is that the trend appears to be holding up rather well in the manufacturing corner of the economy. The ISM’s August report was convincingly upbeat, with the new orders component showing especially strong behaviour last month. As I noted earlier, that’s a good sign for expecting that the favorable trend for this cyclically sensitive sector will roll on. On that note, keep in mind that the headline data for the Empire State Manufacturing Survey (a.k.a. the New York Fed Manufacturing Index) has been tracking the broad moves in the ISM numbers lately. This statistical dance of late implies that if today’s release holds near recent levels, which is widely expected, the prospects will improve a bit for assuming the same for the next ISM release. But no matter what the NY Fed publishes today, it may be swept aside as attention shifts to the update on US industrial production for August, which follows 45 minutes after this release (see below).
US Industrial Production (13:15 GMT) Industrial output has been decelerating for some time. It’s been a gradual descent, punctuated by temporary rebounds. But the annual rate of increase has been inching down for more than a year and so the margin of comfort for weak numbers at this stage is running thin. Indeed, the 1.4 percent year-over-year gain for July is the slowest in more than three years.
On the bright side, the consensus forecast anticipates a sizable rebound today with an increase of 0.5 percent for August over the previous month. If the projection holds, it’ll be the best monthly gain since last November. My econometric modeling sees a softer rise, but at this point it’s fair to say that the general outlook is for a stronger comparison in today’s number after the no-change update in the previous report. Another reason for anticipating a decent gain: the ISM Manufacturing Index in July and August has run up sharply. The industrial production index, by comparison, is treading water. The two benchmarks are hardly interchangeable, but if there’s any connection between improving sentiment in the manufacturing sector and industrial activity generally—and there is, to a degree—today’s news should be at least mildly upbeat.