DR.CHENJIAZI ZHONG

In Brief

• U.S.: Economic activity in both manufacturing sector and non-manufacturing sector continued to expand in September 2017; light vehicle sales in September realized the first gain of the year; weekly jobless claims fell more than expected
• Eurozone: The final IHS Markit Eurozone PMI Composite Output Index increased in September; recovery continued to firm according to the hard data
• U.K.: The manufacturing sector continued to be a bright spot in the U.K. economy
• Japan: Growth remains an under-the-radar story
• Asia Ex-Japan: CFLP PMI increased and continued above the 51-mark for the 12th consecutive month with gradual improvement being obvious; there does not appear to be imminent risk ahead of the political shuffle in China; more on India and Taiwan
• Thought

On the U.S.

Economic activity in the manufacturing sector expanded in September, with the PMI registered 60.8%, an increase of 2% from the August reading and its highest reading since January 2004. The Composite Index was driven by The New Orders Index, which increased by 4.3% month on month, The Production Index, by 1.2%, The Employment Index, by 0.4%, The Supplier Deliveries Index, by 7.3%. the Price Index, by 9.5%. From the perspective of inventories, a slower rate of growth indicates a significant replenishment cycle is beginning and inventories are too low at the finished goods level. Overall, manufacturing is seeing a strong recovery and 17 of the 18 manufacturing industries reported growth in September; this could be diminished with supply constraints and rising. A key manufacturing measure is New Orders Minus Inventories. In September, the gap between New Orders and Inventories indicates a surge in output that will continue into the fourth quarter.

The non-manufacturing sector accelerated during September, indicating stronger growth in the sector; the ISM Non-Manufacturing Index (NMI) grew 4.5% to 59.8. The NMI is now substantially above the January-September average of 56.7 and at a level that will support improvement in employment and is more in line with the rate of the manufacturing expansion. The quickening pace in the NMI was led by across the board improvements in New Orders, Business Activity, Supplier Deliveries, and Employment. In September, pricing pressure intensified as the increase in the Non-Manufacturing Prices Index indicated higher prices on average with a possible hint of inflation; inflation concerns historically begin when the Index exceeds 60 for an extended period. 15 of the 17 non-manufacturing industries reported growth in September; the two industries reporting contraction in September were Arts, Entertainment and Recreation, and Mining.

U.S. light-vehicle sales rose 6.3% in September, which was the first gain of the year, largely attributed to strong demand for light trucks and fatter deals. The robust results underscored by a seasonally adjusted annualized sales rate (SAAR) of 18.58 million for the month blew well past the most optimistic forecasts. It is the highest SAAR since the 20.64 million rate recorded in July 2005 behind employee-style discounts.

The number of Americans filing for unemployment benefits fell more than expected for the week ended September 30. Hurricanes Harvey and Irma continued to impact the data but making it difficult to get a clear picture of the labor market. Initial claims for state unemployment benefits dropped 12,000 to a seasonally adjusted 260,000 for the week.

On Eurozone

The final IHS Markit Eurozone PMI Composite Output Index increased to 56.7 in September, which signaled expansion throughout the past months. September saw rates of output expansion accelerate in both the manufacturing and service sectors, although the former continued to register the superior performance overall. Manufacturing production rose at the quickest pace since April 2011. The rate of expansion in services business activity improved to a four-month high and was one of the best seen over the past six years. The outlook also remained bright, with business optimism rising to a four-month high.

All eight eurozone countries reported a PMI above the 50 percent mark, according to HIS Markit. Germany rose back to the top of the PMI Output Index rankings in September, which expanded at its best pace since April 2011, supported by surging manufacturing sector growth aided by a steep gain in new export business. Ireland was in the second position despite seeing growth slipping to a two-month low. Revival in France gathered pace.

According to the hard data, the recovery continues to firm which, in turn, is creating more taper talk. Also, the euro weakness spurred by the German election could catalyze more inflation, but some soft data is toppy while other series are fading as structural changes are not coming as swiftly or easily as hoped. The hard data shows solid growth in the eurozone is still on track for the third quarter.

On the U.K.

15 months have passed since the Brexit vote in the U.K. During that time, the U.K. PMI has averaged 54.7 with a high of 57.2 and a low of 48.4. The Markit manufacturing PMI posted another strong reading in September of 55.9. The manufacturing sector continues to be a bright spot in the U.K. economy as the industry benefits from a weaker currency and single-market access. It seems that the Brexit has not been detrimental to the manufacturing recovery to this point. Economic conditions in the U.K. were more of the same in September. The OECD released its revised estimates in September and now it sees the U.K. growing the slowest out of the G7 countries this year and next year.

Despite the robust labor market, consumers are no longer the workhorse of the U.K. economy. Jobs are plentiful, but real wage growth is still in negative territory. Residents are spending in less in volume terms and using debt to pay for necessities. Consumer debt to income ratios is creeping up again with consumer credit nearing its pre-recession peak while savings plunge. Mounting consumer credit has been worrisome for some time and then exacerbated by Brexit.

On Japan

The recovery is looking sturdy and durable ahead of the snap election on October 22. The upward trend in inflation continued in Japan. The weakness in the Yen has helped exports, which is a key for Japan. Market participants ran into and out of the safe-haven currency in August and September in response geopolitical tensions. According to the latest trade data, that volatility did not dent exports.

The manufacturing PMI made a broad-based move up to 52.9, finishing the third quarter on a strong note. Sentiment remains upbeat through escalating North Korea threats and ahead of the general elections. The Tankan survey for the third quarter showed business sentiment in the manufacturing was the most upbeat in a decade. Business sentiment in the nonmanufacturing sector continued to move largely sideways. Manufacturing sector profits and prices were also on the rise across all firm sizes. Production capacity and labor became less sufficient, signaling less slack in the economy.

Prime Minister Abe announced snap elections for October 22nd and an economic stimulus package. Initial polls show Abe’s LDP party is ahead, but the estimates vary widely. Tokyo Mayor Yuriko Koike just launched a new national political party called “Party of Hope.”

On Asia Ex-Japan

The China’s CFLP PMI increased by 0.7% and continued above the 51-mark for the 12th  consecutive month with gradual improvement being obvious. The Caixin China general Manufacturing PMI (51.0, -0.6) provided a weaker signal in a four-month expansion after a one-month decline. It is tough to see much rocking the boat before the Politburo meeting in mid-October. There does not appear to be imminent risk ahead of the political shuffle. China’s soft-landing is still intact, as evidenced by the latest PMI readings. The CFLP manufacturing PMI ticked up to 52.4 while the non-manufacturing PMI moved up to 55.4 in September. Growth in retail sales, fixed asset investment, and industrial production all deaccelerated further in August, but are still exhibiting respectable growth. The PBOC’s action to relax currency controls is another sign of confidence. However, the recent drop in iron ore is worth noting. India’s manufacturing sector and the posting of PMI for September indicated a slowness to adapt to the new Goods and Services Tax is implemented. Taiwan’s CIER/SMIT PMI continues to post very strong numbers, particularly in its Computers, Electronic and Optical Products industries.

Thought

Looking ahead, the OECD’s Leading Economic Indicators (LEIs) continue to indicate economic activities for both the third quarter and fourth quarter will be milder in most G7 countries, as the “spinach” period commences in U.S. politics and real growth drivers are pushed out further and further. On the flip side, LEIs for India, China, and Mexico are all reaccelerating, signaling better growth for the second half of 2017 in each of those countries. Despite, the OECD’s Total LEI is still showing the global economy will undergo a softer patch over the next six months, though growth should remain adequate.