Tuesday’s a slow day for economic reports in Europe, which means that the monthly release on industrial prices for the Eurozone will draw close attention as the markets reassess deflation risk and look ahead to the European Central Bank’s monetary announcement on Thursday. In the US, manufacturing will be in focus, with the first look at the August data in the ISM Manufacturing Index. We’ll also see an update on July construction spending in the US, which is expected to rebound after a weak number in June.
EU: Industrial Prices (09:00 GMT) The best-case scenario is that the Eurozone economy is stagnating. The darker view is that a new recession has started — or should we call it a new phase of the previous recession that never ended? Whatever your preference, the macro trend looks precarious, and quite a lot of the trouble is bound up with disinflation/deflation. Last week’s flash estimate for inflation in August is the latest warning: consumer prices rose by only a slim 0.3% for the year, the slowest pace in nearly five years.
Today’s report on industrial prices for July will offer a new excuse to focus on deflation risk. In the previous release, the numbers brought a bit of relatively encouraging news: a slight increase (0.1%) in producer prices for June in the monthly comparison. That was the first rise since last December.
Unfortunately, a repeat performance of the welcome June rise in today’s report for July looks like a slim possibility. The figures for Germany and France have already been published, and in both cases deflation returned on a monthly basis, according to Eurostat. Spain’s wholesale prices managed to rise marginally in July, but the 0.1% increase isn’t likely to overcome the slide in Europe’s two largest economies. (Italy’s July data on producer prices is scheduled for release later this month).
The main problem is that outright deflation in the year-on-year comparison for Eurozone industrial prices is old news at this point. Prices have been sinking on an annual basis since last summer and today’s update isn’t going to change this disturbing trend. What today’s report will do is provide another statistical incentive for the ECB to roll out a program of quantitative easing at its monthly announcement this Thursday.
QE is far from a silver bullet at this late date. But with the macro evidence piling up that Europe’s heading into a rough autumn, the crowd’s expecting the ECB to act in a bold manner this week.
Some analysts remain skeptical that the ECB will do more than talk on Thursday. But make no mistake: inaction will be particularly hazardous at this stage. There’s virtually no disagreement that the Eurozone is at risk. But it’s not clear that QE is a certainty at this point. As Reuters reported yesterday: ECB sources last week said that “new action on Thursday was unlikely but not impossible, and that the barrier to QE was still ‘very high’”. 
US: ISM Manufacturing Index (14:00 GMT) Manufacturing has been a leading source of strength in the stronger run of economic numbers in recent months and today’s August update for this cyclically sensitive sector isn’t expected to tell us otherwise.
The ISM Manufacturing Index rose to a three-year high in the July report. Today’s release is projected to show some easing to 56.8 for August compared with 57.1 in the previous month. But that still leaves the index deep into growth territory (and well above the neutral 50.0 mark).
One reason for thinking that today’s ISM number will stick close to a three-year high is the previously published August estimate of the Markit US Manufacturing Purchasing Managers Index, which jumped to its highest reading in more than four years. “Stronger employment growth was a key factor boosting the headline PMI reading in August,” said Tim Moore, Markit’s senior economist. (Markit’s revised PMI data for August, by the way, is also scheduled for release today at 13:45 GMT, or just ahead of the ISM report.)
A bullish set of numbers today sets us up for positive expectations for Friday’s August data on US payrolls. This week's jobs report is widely expected to post another solid gain in excess of 200,000. If there are threats for the US macro trend at the moment, it’s the uncertainty linked to struggles and various geopolitical risks in Europe. Taking US data at face value, however, still paints an encouraging profile and today’s numbers will likely deliver more of the same.
US: Construction Spending (14:00 GMT) The dollar value of new construction activity slumped in June, sustaining its biggest monthly drop in more than three years. Another worrisome sign in last month’s release is the decelerating rate of growth in the year-on-year trend, which left the annual 5.5% increase at its lowest level since last autumn. But the soft data is on track for a revival in today’s report.
One clue for anticipating a rebound in July’s construction spending: the strong gain in the Architecture Billings Index for July. The benchmark, published by the American Institute of Architects, is considered a leading indicator of construction activity, so July's rise in this index to its highest level since 2007 is a bullish sign. “Business conditions for the design and construction marketplace, and those industries associated with it, appear to be well-positioned for continued growth in the coming months,” said AIA’s chief economist Kermit Baker in regard to last month’s update.
Meanwhile, construction-related lending in the second quarter had its largest rise in more than a year, according to a report published last week by the Federal Deposit Insurance Corp. "Lenders are growing more comfortable extending credit, and demand for credit is improving,” the chief economist for Moody’s Analytics told The Wall Street Journal last Thursday. “Both residential and commercial construction should steadily improve going forward, because the level of construction remains very low by historical standards, and vacancy rates are falling.”
Keep in mind, too, that new residential construction also had a good month in July. Housing starts rebounded to 1.093 million (at the seasonally adjusted annual rate) in the last update — the highest since last November.
Given the optimistic backdrop, it’s no surprise that analysts are upbeat about today’s July figures for construction spending. The consensus forecast sees expenditures jumping 0.9% for the monthly comparison. That is a sharp turnaround from the 1.8% decline in June. 