05/01/2011: Services PMIs - December 2010

Today's data from NCB Stockbrokers on Services PMIs (Manufacturing sector PMIs were covered in the earlier post here). The trends are generally worrisome:
First the headline numbers:

• Overall business activity index in services sectors has dipped below expansion mark of 50, with December reading of 47.4 signaling an outright and sharp-ish contraction. 12-months average for the sector was 50.7 - hardly blistering growth, but still a notch above the waterline. Q4 average is now at 49.7 - a steady decline from the annual peak of 52.9 in Q2 and slightly less impressive 52.5 in Q3.
• New Business index fell to 46.2, marking 4th consecutive month of below 50 performance. 12-months average is at 49.8, with Q4 reading of 46.8 being the lowest quarterly average of 2010.

A snapshot of the series:
Now to detailed sub-indicies:
Since I will be posting separately on employment, it is just worth mentioning that (a) employment index remains under water since February 2008 - marking a truly scary contraction stretching uninterrupted over 34 months now, and (b) employment index fell even lower in December (to 47.8) than in November (48.7).

The rest:

• New Export Business index is in contraction territory with December reading of 49.7 being the first sub-50 month since August 2009. 12-months average was 53.6 while Q4 average fell to 52.6 from 52.8 in Q3 and the annual peak of 55.3 in Q2.
• Despite this, Business Expectations actually rose to a strong 62.2 in December against 55.2 in November. 12-months average was 65.5, ahead of Q4 average of 62.8, which marked the lowest quarterly performance of the index for 2010.
• Profitability remains poor cousin of expectations - Profitability index reached 46.1 in December, down from 48.4 in November. To see last month when profitability was in expansion mode we would have to go back to December 2007, so this December marks 36th month of shrinking profitability for Irish services producers.
  

Chart above concludes by showing some recovery in prices trends, with output prices still lagging inputs prices inflation. In fact, the gap between two series, having opened up once again around Q2 2010 remains wide.

05/01/2011: Manufacturing PMIs - December 2010

Manufacturing PMIs were released earlier this week by NCB Stockbrokers (a truly useful service for all concerned with the Irish economy - see the third post on PMIs to come for the true reason). Here are the updated charts and some comments:
First what matters most on GDP side - second consecutive month of declining growth on New Exports Orders side - December reading was at (still expansionary) 54.0, down from 54.7 in November and 54.9 in October. 12-months average was 55.5, so we have a signal of relative growth slowdown into Q4 (average 54.5), compared with Q2 and Q1 (averages of 57.4 both), but of Q3 (52.7).

Total New Orders are robustly up to 53.2 reading for December (12-months average is 51.7), but December increase was not enough to push poor performance in Q4 (average for the quarter is 51.6).

Overall PMIs for Manufacturing are signaling relatively positive momentum, rising to 52.2 in December, from 51.2 in November, marking third consecutive monthly rise. December reading is above 12-months average of 51.2 as is Q4 average reading (51.4).

Here's a close-up:
But what about capacity?
So far, capacity remains below growth line (50 reading signifies expansion, of course), suggesting - strongly - that Irish companies are not running out of existent capacity yet. Which means productivity will continue grow, and that's the good news. The bad news is that with capacity remaining underutilized, there's no real hope for strong growth in either wages or employment.

Although index of Employment rose above 50 line - reaching 50.5 in December for the first time since May 2010 (when it stood at 51.5 - and then again, nothing really happened on employment side, as sustained jobs creation will require consistent above 51.3-52 readings in the index). Clearly, Employment prospects have improved - December reading was 2.6 points above 12-mo average reading of 47.9, and Q4 average - at 49.9 - is almost touching jobs-neutral expansion.

Most worrisome to me is the New Exports Orders data - as discussed above, although the series is generally more volatile than Total Orders series, it is clear to me that going forward, domestic demand of the Total Orders is not going to hold.

Another issue - more of a question, than concern is: backlogs of orders rising appears to be driving up forward employment expectations. There seem to be some 3mo plus lag in the two series, so delivery time remaining relatively benign, but under pressure, it is difficult to make a call on employment index reading. That said, employment index for manufacturing does show stronger correlation, historically with overall sector PMIs than in the case of services (but more on this in the third post on PMIs later today.

Again, the credit for data goes to NCB Stockbrokers, but analysis (and any errors it may contain) is solely my own.

05/01/2011: Eurozone growth - January

For the first post of 2011. So a slightly belated wish to all of the readers: May 2011 be (in no particular order of importance):

• A prosperous and a fruitful one
• A healthy and a happy one
• A year for me to write better research and for you to comment more on it
  
• A year of renewing the political and economic strengths of the countries we call our homes.

Oh, and may the 30-year bull market in fixed income finally come to an end in 2011. Why you may ask? Because I, for one, am sick and tired of watching the sovereigns from the US to the EU to Japan borrowing beyond any control to underwrite unsustainable status quo of our bankrupt social democratic models. Leveraging our children and ourselves to pay for the dubious 'benefits' of redistributive 'justice' is unlikely to end with anything but tears. And the latter stage of history is uncomfortably close for all of us to continue ignoring the facts of our economic sickness.


Now, to the top of the newsflow from the EU-wide perspective.

The latest Eurocoin leading indicator for Eurozone growth was out recently and hence the updated details:
December performance was above November, reaching 0.49 - 4bps above November reading of 0.45. As of the beginning of January, Eurozone economy signals expansion that is yoy some 28% weaker than in January 2010 (December 2009 reading was 0.68).

Historically, Eurocoin is a pretty decent longer-term leading indicator (70%+ RSq) for the trend in the Eurozone GDP growth:
The new reading is consistent with growth of ca 2.0% and is driven primarily by industrial production and producer confidence. However, Eurozone industrial production growth has been declining persistently from the annual peak achieved back in May. Per latest (October) data, Germany continues to power ahead with strong positive growth, France and Italy remain at near zero growth and Spain's industrial output growth sticky in negative territory.

Composite PMIs for Germany (through December) powering ahead, while staying in contraction territory in France, Italy and Spain. Consumer confidence is at 2007 levels in Germany, while staying below the water line in other three economies (see chart):
Source: CEPR

I will be blogging on Ireland's PMIs in few hours tonight, so stay tuned for comparatives to the homeland.

Economics 24/12/10: Retail Sales for November

Retail sales stats were out this week, prompting the usual 'upbeat' comments from the official analysts.

Here's an example from one bank analyst (emphasis is mine):

"November retail sales figures show a second consecutive monthly increase in sales volumes. The 0.2% rise last month followed a 0.3% monthly gain in October, representing the first back-to-back monthly increases since March/April. This leaves total sales in October/November running some 0.4% above the average level seen in the third quarter."

Oh, Mighty Aphrodite, folks. Time to pull the crackers out and funny hats? Alas, no. The quote above is so full of spin, you get dizzy after the first two sentences and by the end of the second paragraph all systems collapse is virtually inevitable. For reality is nowhere to be seen in the claims made above.

Take a look at the full seasonally adjusted figures for sales:

First, levels of sales - volume and value
Few things are worth noting:

• November shows that we - consumers in Ireland - are purchasing 23.89% less today than in February 2008 - the peak of our retail sales volumes
• Same figures show that we are buying 17.45% less value relative to October 2007 - the peak point in the value of sales index
• We are now consuming some 9.2% less in terms of volume and 4% less in terms of value than in 2005
• November 2010 index of 90.8 seasonally adjusted volume of sales is below that in November 2009 (91.8) and November 2008 (109.1)
• November 2010 index of 96 seasonally adjusted value of sales is above that in November 2009 (95.1) but below November 2008 (106.5)

Chart above shows changes in two series mom and yoy. Three things are worth noting there:

• Mom - both series are pointing down, with alue index going from +0.6% in October to -0.1% in November, while volume index from +0.3% to +0.2%
• Yoy - value index going from -0.3% in October to -1.1% in November, while volume index moved from +1.9% in October to +0.9% in November
• Yoy there has not been a positive growth month in terms of value of sales since April 2010

Our friendly economist quoted above went on in his/her note:
"As has been the case for much of the year, the overall picture is being flattered somewhat by rising levels of car sales. This was a pattern that was again evident last month, according to the CSO, as the motor trade category posted a 0.4% monthly rise in sales volumes. While modest by the standards of the stronger increases in car sales earlier in the year, this was still enough to pull total sales higher in November as core sales (which strips out the motor trade) fell by 0.2% on the month. This 0.2% fall in underlying sales followed a flat reading in October to leave core sales running about 0.5% lower than their average level in the September quarter."

Well, notice - there are no yoy references. Shall we take a look?
As above:

• Relative to the peak (February 2008) value of core retail sales today is down 19.09%
• Relative to the peak (October 2007) volume of core retail sales today is down 12.90%
• There are clearly two moments - around Q1-Q2 2010 when the volumes and values of retail sales ex-motors peaked locally - prompting the very same analysts to start trumpeting the recovery in retail sales, alas, all of these 'gains' were exhausted
• Ex-motor retail sales have reached another record lows in terms of both volume of sales and value in November 2010.
  

While the picture above confirms that there is little ground for optimistic reading of retail sales let's do justice to the quotes above:

• While celebrating the first consecutive two months rise in volume of retail sales since April,
• Keep in mind we also had (1) third consecutive month of declines in the value of core sales - the first time since December 2009, (2) 28th consecutive month of annual declines in the value of core sales, (3) 6th consecutive month of annual declines in the volume of core sales.

Looking at subcategories of sales, 7 out of 12 categories posted declines in volume mom and 8 out of 12 yoy. In value terms these figures were 7/12 and 9/12 respectively. In October 2010 we posted 9th worst performance in retail sales volumes in EU27 and 5th worst in Euro area 16.

Economics 24/12/10: Forecasting 2010 Trade performance

As a follow up for the previous post, here are my forecasts for levels of Exports, Imports and Trade Balance as well as Terms of Trade for Ireland for 2010 - using monthly data:
Overall, Terms of Trade deterioration in October 2010 stood at -5.12% on the best reading for 2007-to date.

Economics 24/12/10: Ireland's Trade Balance

With a slight delay, here is a deeper look into Ireland's trade performance through October.

First - exports and imports in levels:
Notice first that Imports are following steeply down-trending line, while Exports are trending flat and even slightly down over 2007-to-date period. Encouragingly, since May 2010, Exports are managing to stay well above their longer term trend line.

Summarized in the tables below, monthly and annual figures show clearly that significant gains in the trade balance are driven primarily by the continued declines in imports.


Hence, trade balance gains - impressive at +7.46% month on month and 11.95% in year on year terms:

At the same time, strong performance in Trade Balance is coming against the tide of adverse changes in the terms of trade: September marked the 4th consecutive month of deteriorating terms of trade, with a fall of 0.7% on August. Overall, since May 2010 terms of trade
have fallen by a cumulative 5.11% through September 2010. We can now expect this process to continue through October-November and cumulative May-October loss in terms of trade to rise to 5.9-6%.

It is worth taking a closer look at the relationships between trade balance components and terms of trade over the 2007-2010 period.

There is no statistical relationship between the level of exports and the terms of trade over 2007-2010 (through October). The relationship stands at y = 0.0175x + 7257.1, R2 = 1E-08. There is a relativeley weak, but strengthening relationship between trade balance and the terms of trade (as reflected in levels). In 2007-2009 data, terms of trade were able to explain roughly 0.32% of variation in the Trade Balance (y = 14.215x + 1385.2; R2 = 0.0032). Including data through October 2010 provides for much stronger explanatory power of 12.3% (y = 90.668x - 4989.4; R2 = 0.1228).

As chart below shows, correlation between levels of exports and imports has reversed sign in 10 months through October 2010 (to – 0.1458) compared with the first 10 months of 2009 (+0.3264). In longer terms, 2007-May 2010 data implied relationship between the levels of exports and imports was: y = 0.3266x + 5726.9; with a strong R2 = 0.2171. Adding data through October 2010: y = 0.1953x + 6398.5 and lower R2 = 0.0802.

Looking at the annual data:

Using annual data for 1990-2010 (where 2010 is my forecast values) we have weak relationships between growth rates in imports, exports and trade balance as a function of terms of trade changes. My full year 2010 forecasts are: Imports value €43,506mln, Exports value €85,209mln and Trade Balance of €41,703mln. This represents a forecast of 3.4% drop year on year in imports, 2.02% rise in exports and a jump of 8.4% in trade balance.

All of this data clearly suggests accelerated process of transfer pricing by profit-generative MNCs during the 2010 period. In fact, looking at log-relationships, growth in the trade balance is currently being explained by faster shrinking imports than the changes in exports. Coupled with deteriorating terms of trade, we have strong suggestion that our trade performance is being sustained primarily by the MNCs driving through strong expansion of profit-booking transfer pricing.

Of course, one should remember that whether due to transfer pricing or organic exports growth or - as indeed is the case, both - the improving Trade Balance is about the only positive news we can count on in 2010.