Monday’s a light day for scheduled economic releases, although the limited lineup of updates may give a strong indication of the outlook for macro risk. First up is the Ifo Institute’s monthly profile of business sentiment in Germany. Later, two US reports will be closely read for guidance on assessing the degree of forward economic momentum.
Germany: Ifo Business Climate Index (09:00 GMT) German economic resilience has undoubtedly kept Europe from suffering a more miserable fate. Although the last several years have been no picnic for the Eurozone, the macro climate would surely be a whole lot worse these days if German experience mirrored that of France or Italy.
Time for celebration and caution ... German resilience has spared Europe from deep economic woes, but the nation's economic outlook is as frightful as the weather. Photo: Thinkstock
Granted, that’s a thin reed to hold onto, since Europe overall is still burdened with what can only be described as an extended run of stagnation, interrupted by an occasional if comparatively mild recession at times. But even that low bar may be assuming too much if, as some analysts fear, Germany is now sliding, ever so gently, into the quagmire.
Last week’s preliminary November data for the German Purchasing Managers Index (PMI) highlights the looming threat. Although business activity remained positive, the latest PMI shows that growth is weak, and getting weaker. “The combination of weak output growth, ongoing spare capacity and a lack of new order wins (despite a further reduction in charges) paints a worrying picture of the underlying health of the German economy,” advised an economist with Markit Economics. “The average PMI reading for the final quarter of the year so far is the weakest since Q3 2013, suggesting that the German economy may fail again to see any meaningful growth in the fourth quarter, after GDP expanded by a marginal 0.1% in the three months to September.”
The disappointing profile for Germany – a “sputtering engine,” according to The Economist – inevitably deepens the pessimism about the continent overall. Not surprisingly, the current Q4 GDP estimate for the Eurozone is effectively flat – a miniscule 0.01% for the quarter-over-quarter comparison, according to Now-Casting.com –and therefore a slower pace that even the sluggish 0.2% gain for Q3.
Meantime, today’s update on sentiment in Germany’s business sector offers a fresh perspective on the outlook. The Ifo data is closely followed as a proxy for changes in GDP, although by that standard the guidance for Germany’s economy looks increasingly challenged. The Business Climate Index, which combines the current and expectations data, has been sliding for months. Today’s release is on track to deliver more of the same, albeit with a slight uptick in the expectations metric, according to the consensus forecast from Econoday.com.
A mild improvement in the forward-looking benchmark would be welcome, of course. But today’s numbers overall aren’t likely to offer much relief from the view that Germany is flirting with economic stagnation.
US: Chicago Fed National Activity Index (13:30 GMT) The global economy is looking wobbly these days, due in no small part to sluggish-to-flat growth in Europe, Japan’s contracting economy and China’s deceleration to something resembling moderate growth, replacing the former red-hot macro trend in the world’s second-largest economy. The US, however, seems to be immune to the fallout. That at, least, is what the numbers tell us to date, and today’s big-picture update on the US from the Chicago Fed Index will likely dispense a similar view from the vantage point of last month’s macro trend.
This benchmark of 85 indicators has been reflecting an above-trend expansion for seven straight months through to September and my econometric modeling implies that number-eight will arrive in today’s release. The three-month average for the index is projected to decelerate to 0.11 for last month, down from 0.25 in September, based on the median estimate for several predictions. Keep in mind that any reading above zero equates with above-trend growth, relative to the historical record. In short, October’s data (via the three-month average) is expected to show that the moderate rate of expansion of late was intact through last month.
The question is whether the weakness that’s popping up in varying degrees around the world will take a toll on the US trend. Well, yes – of course. The US may be resilient, but it’s not in an economic vacuum. A hint of things to come turned up in last week’s flash November estimate of Markit’s US Manufacturing PMI, which showed that growth dipped to its slowest pace since January. The soft numbers are due primarily to “manufacturers reporting the largest drop in export orders for nearly one and a half years," explained Markit’s chief economist, Chris Williamson.
Today’s backward-looking report from the Chicago Fed will probably betray few signs of weakness. But it’s reasonable to assume that future updates will suffer a little as the rising headwinds around the world begin to blow a bit harder in the US. 
US: Services PMI (14:45 GMT) Today’s release offers the week’s first new clue on how the US economy is faring in November. The insight on the trend for the dominant source of business activity will be closely read as the market looks for any signs that the global slowdown is beginning to pinch business activity in the US.
Recent updates on the services sector already reflect a weaker rate of growth. So another month of softer growth in the current climate would be taken as more evidence that the US recovery is at risk, if only on the margins. That seems to be the message in last week’s PMI estimate for manufacturing (see note above). Given that report, it wouldn’t be terribly surprising to learn that the expansion in services also cooled a bit in November.
The US continues to post broadly positive numbers overall and today’s PMI report isn’t likely to challenge the generally upbeat outlook. Nonetheless, with analysts worried about the outlook for growth in Asia, there’s a general sense that the months ahead will be more challenging for everyone.
It’s debatable how much of a threat the deceleration poses for the US. The key question for the week ahead: has the crowd been underestimating the potential for trouble? Fresh guidance on how to answer starts with today’s flash PMI report for the US services sector. 
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