8/3/2012: ECB - policy dilemma remains

Much has been said, following today's ECB rates decision, about 'reappearing' inflation. Alas, much of that is, in my view, pure invented excuse. Inflation, if anything, is currently moderating - still well above the target, but declining. It his 2.7% in May-June 2011, then 3.0% in September-November and is running at 2.5-2.4% now (by my estimates for February). January inflation was the lowest since August last year.

While I personally think that we are facing inflationary pressures in medium term future, I don't see the urgency for tightening monetary policy today or for holding rates at 1%, unless one is to think that liquidity injected via LTROs into the banking system will start percolating into the real economy. The latter is unlikely to happen any time soon, in my view.

So what does the latest decision tell us about the ECB policy direction? Not much, if we are to go by the numbers. Instead, the latest decision continues to reinforce what I would term policy 'psychosis' - the situation whereby the ECB is clearly stuck between two targets (one acknowledged, aka inflation, another implicit, aka economic growth).

Charts illustrate:

First consider leading growth indicator and the relationship to ECB repo rate:

Growth conditions in the euro area clearly suggest rates at below 1%.

Now - inflation:

Inflation conditions clearly point to rates well above 2%.

I've highlighted this policy dilemma before and so far, there is nothing that has changed. So it's not about 'inflation threat' and it is not about 'growth support' - the ECB policy appears to be a clawback on LTROs...

5/3/2012: Fiscal Compact Referendum: Globe & Mail

My article on Fiscal Compact Referendum for the Globe & Mail : here.

5/3/2012: Profit Margins in Services and Manufacturing: February PMI

In the previous three posts I covered Manufacturing PMI, Services PMI and employment sub-indices from February 2012 PMIs releases. In this post we shall take a look at profit margins in both Services and Manufacturing.

All original data is courtesy of NCB, with analysis provided by myself. Indices reported below are derived by me on the basis of proprietary models.

Chart below clearly shows the dynamics in profitability across two sectors:

• Based on movements in Services index components for input costs v output charges, profit margins index in the sector has posted slightly slower rate of deterioration in February (-14.23) against January (15.08). This marks the second consecutive month of slower declines in profit margins. Thus, 12mo MA stands at -17.0 and 3mo MA through February 2012 is at -15.9, an improvement on previous 3mo MA of -16.4.
• Profit margins conditions in Manufacturing have deteriorated in February (-22.31) compared to January 2012 (-17.67) marking the 5th consecutive month of deepening declines. Thus, 12 moMA is now at -17.2 and 3mo MA at -18.7 against previous period 3mo MA at -11.1.

So tougher conditions for profitability in both sectors and, in line with that, tougher stance on employment front.

5/3/2012: Services & Manufacturing Employment - PMI data for February

In previous posts I have covered new data on Manufacturing PMI and Services PMI. In this post, I will look closer at Employment sub-indices by these two broad sectors.

As before, all original data is courtesy of NCB, with analysis provided by myself. Some of the indices reported are derived by me on the basis of proprietary models and are labeled/identified as such.

Chart above shows core PMIs for Services and Manufacturing, highlighting the following changes:

• Manufacturing PMI moved from 48.3 in January to 49.7 in February, remaining below 50 line, signaling weaker contraction mom. 12mo MA is now at 50.3 and Q1 2012 average running is 49.0 against Q4 2011 average of 49.1.
• Services PMI has improved from contractionary 48.3 in January to expansionary 53.3 in February, with 12mo MA at 51.0 below february reading. Q1 2012 running average is 50.8 and it is almost identical to 50.9 average for Q4 2011.
• Volatility of Manufacturing PMI had risen from the STDEV of 4.48 in 2000-present sample to 5.62 for 2008-present sub-sample (crisis period), while volatility of Services PMI had fallen from 7.75 in 2000-present to 6.60 in 2008-present.

The chart below summarizes Employment sub-indices for Services and Manufacturing PMIs:

• Employment index in Manufacturing has deteriorated from 49.5 (contractionary) in January to 49.3 in February, with 12mo MA now at 49.9, Q1 2012 running average of 49.4 and Q4 2011 average of 48.6.
• Employment index in Manufacturing has become more volatile during the crisis, with STDEV rising from 4.41 for the sample of 2000-present to 5.51 for the crisis-period sample.
• Employment index in Services has improved from contractionary 44.5 in January to still contractionary 47.9 in February, with 12mo MA at 47.7 and Q1 2012 running average of 46.2 against Q4 2011 average of 47.3.
• Employment in Services is less volatile since the crisis on-set, with STDEV of index running at 6.71 for the sample of 2000-present against crisis period STDEV of 5.64.
• Overall, Employment index in Services is virtually as volatile during the crisis period as the Employment index in Manufacturing. However, before the crisis onset, and historically overall, employment was much less volatile in Manufacturing than in Services. This suggests, given strong growth of our exports in Manufacturing compared to Services, that most of our current exports boom is explained not by real economic activity, but by transfer pricing - a conjecture supported by my analysis of the trade data here. Note, that this is also consistent with lower overall employment and lack of jobs creation despite the relatively strong singlas coming from the PMIs in both sectors.

Charts below clearly show that our 'exports-led' recovery is not creating jobs and is instead associated with overall net jobs destruction continuing to rage across the economy.

So what is going on? we can only speculate, but in my view, 


Reasons why our Services PMI growth is not translating into jobs creation are: 
(1) much of growth is due to transfer pricing via IFSC & likes, 
(2) Maj of services exports are not labour intensive (hours worked) but skills intensive (high-end skills generating high value added), 
(3) Domestic services continue to shrink (retail etc), 
(4) Profit margins are very severely strained - so profitability has ben shrinking since end of 2007 every month, implying cuts in employment to raise productivity, 
(5) Many of jobs in services exports are NOT employing domestic workers as lack of skills drives these jobs into international markets. And these are the growth areas, while domestic employment sectors are shrinking. 


Incidentally, this is not new. 


Since the beginning of data series, in Manufacturing, we had 33 months characterized by rising unemployment and rising exports (exports-led jobless recovery) against 43 months of jobs-creating exports-led growth. So there is a 43.4% chance that any recovery in Irish manufacturing will be jobless. This chance is much higher during the current crisis, with 20 monthly episodes of jobless recovery against just 8 jobs-creating recovery episodes.


Similarly, in Services, since the beginning of the data history, we had 31 episodes of jobless recoveries against 32 episodes of jobs-creating exports growth. So probability of 49.2% is associated with seeing jobless recovery if a recovery is exports-driven. Since the beginning of this crisis, there were 26 jobless exports-growth episodes against only 1 month when jobs growth coincided with exports growth.


The above, of course, show exactly how fallacious it is to anticipate exports growth to translate into jobs recovery.

5/3/2012: Services PMI - some improvement in February

In the previous post (here) we looked at the latest PMI data for Manufacturing. This post updates data for Services PMI. Subsequent posts will deal with employment and profit margins across both sectors.


As before, all original data is courtesy of NCB, with analysis provided by myself. Some of the indices reported are derived by me on the basis of proprietary models and are labeled/identified as such.

Table below summarizes main data:

 
Per chart above, core Business activity in the sector showed improved dynamics in February (53.3 - statistically significantly different from 50) relative to contractionary reading in January (48.3). 12moMA is now at 51.0, while 3mo MA is 50.0, suggesting that the series are returning to the moderate growth trend established since the beginning of 2011.

Per chart below, the trend in overall Services PMI is driven by New Business Activity which also showed significant improvement in February (53.5) against January (49.7), with 12mo MA now running at 49.8 and 3mo MA at 50.2.

The following chart plots a number of sub-indices. The critical one is New Export Orders which shows significant increase mom into solid growth territory. The sub-index rose from 52.8 in January to 55.2 in February, with 12mo MA now at 52.5 and 3mo MA running ahead of that at 53.4.

Another critical sub-index is Employment, which remained disappointingly below 50 mark at 47.9, but improved from 44.5 in January. 12mo MA is at a very poor level of 47.7 and 3mo MA is at even worse level of 46.6. The sub-index has now been showing contraction in employment since May 2011, and barring April 2011 strange move above 50 mark, the sub-index remains signaling rising unemployment since February 2008. I will deal with employment signals in more details in the subsequent posts.

Lastly, February data showed slight moderation in the price deflation in terms of output prices/charges from 46.7 in January to 47 in February. On the other side of the profitability equation, input costs inflation moderated to 54.8 in February from 55 in January. The two indicators combine to result in slowdown in the deterioration in profit margins from 42.5 in January to 48.2 in February. Please note, this is not the same as an improvement in the profit margins. Profitability sub-index is now averaging 44.6 for 12mo MA and 45.3 for 3mo MA. There is basically continued shrinkage in the profit margins for Irish Services suppliers every month since December 2007. More detailed analysis of profitability will be posted in subsequent posts.

In the next post we will look at the Employment signals coming from the Manufacturing and Services PMIs.

5/3/2012: Weak Manufacturing PMI for February

In the next few posts I will be updating the current data on Irish PMIs. This first post will be focusing on core PMI data for Manufacturing. All original data is courtesy of NCB, with analysis provided by myself. Some of the indices reported are derived by me on the basis of proprietary models and are labeled/identified as such.

Taking from the top:

• Core Manufacturing PMI has posted shallower contraction at 49.7 (statistically insignificantly different from 50.0=no change) in February. This signals compounded contraction on January deeper rate of deterioration (48.3).
• 12mo MA for core PMI is at 50.3 with 3mo MA at 48.9. Previous 3mo period average was 38.4, so there is no consistent break from the shallow negative growth trend so far.
• Same 3mo period in 2011 averaged 54.9 and in 2010 - 48.5. Again, data suggests roughly similar dynamics today as in 2009-2010, not 2010-2011 period.

• New orders sub-index reached marginally above 50 in February at 50.1, marking substantial improvement since January 46.8 reading. 12mo MA is at 50.2 - in effect showing no growth in the last 21 months. 3mo MA remains strongly contractionary at 47.6
• New exports orders posted a deterioration and slipped into negative growth territory at 49.7 in February from 50.9 in January. 
• Output subindex clearly shows the established flat trend that is running since mid-2011. Output rose to 50.4 (statistically indistinguishable from 50) from contractionary 47.3 and is now running ahead of 3mo MA of 48.8, but behind 12mo MA of 51.5.

Chart below shows more recent snapshot of data with clear evidence of flat - zero-growth - trend since mid-2011.

Two charts below detail other components of the Index:

• Backlogs of work slightly improved to slower contraction-signaling 43.8 from 41.1 in January
• Quantity of purchases also improved by posting shallower rate of decline at 48.7 agains 47.1 in January
• Critically, February output prices posted deeper deflation at 47 against 48 in January. Output prices are now staying in deflationary territory since August 2011.
• Input prices inflation shot up in February to 60.5 from already inflationary 58.3.
• The two movements above mean profit margins have shrunk in Manufacturing - although more details on this in later post dedicated to profits margins in both Services and Manufacturing sectors.

Real disappointment comes from Employment sub-index:

• Employment sub-index in Manufacturing has posted slight acceleration in contraction from 49.5 in January to 49.3 in February
• The index is now running below 50 - on average - over 12 months. Last 3 mo MA is 49.8, which is down from same period of 2011 when it stood at 51.8.
• Given the above profitability trend, it is likely that Manufacturing Employment will not be posting any serious growth any time soon.

Next post will update data for Services PMI.