3 Numbers To Watch: Japan All Industry Index, US CFNAI & Redbook

Tuesday is a slow day for scheduled economic reports, although three numbers bear watching for clues about the economic outlook in Japan and the US: the Japan All Industry Index, followed by the US data for the Chicago Fed National Activity Index and the Johnson Redbook Sales Index.

Japan All Industry Index (04:30 GMT): Yesterday’s update on exports in July suggest that Japan’s economic recovery remains intact. Exports jumped 12.2 percent last month versus a year earlier, which translates into the strongest gain in three years. The increases to Europe and the US were particularly robust, with year-over-year export gains of 16.6 percent and 18.4 percent, respectively. The upbeat news on exports arrives in the wake of concern that the Japanese economy is slowing, as suggested by the 2.8 percent increase in GDP in the second quarter versus 5.4 percent in the previous quarter. But as the latest data on exports imply, the positive momentum may have slowed but it remains firmly positive.

In search of deeper context about the macro trend, the market will be keenly focused on today’s update of the All Industry Index, which is considered a monthly proxy for GDP data. By that standard, momentum continues to trend positive. The All Industry Index, a broad measure of output in Japan, increased 1.1 percent in May, the most in a year-and-a-half. Nonetheless, today’s June data is expected to decelerate if not decline, or so it appears via the previously released Tertiary Index, which tracks activity in key sectors that are included in the All Industry benchmark. The Tertiary Index retreated 0.3 percent in June, although it remained higher on the year by 1.4 percent—the second-strongest annual comparison since May 2012. In sum, the expected decline in today’s monthly number for the All Industry Index would confirm that the second quarter ended with a moderately slower pace of growth. Even so, the robust rate of expansion in exports in July suggests that Japan’s economy will continue to forge ahead and perhaps even pick up speed in the third quarter.

US Chicago Fed National Activity Index (12:30 GMT): This broad measure of US economic activity continues to tell us that the recession risk remains low and today’s update for July is expected to reconfirm that view. My econometric modeling projects that the three-month average for the Chicago Fed National Activity Index (CFNAI-3MO) will remain unchanged at minus 0.26 for last month-—a level that equates with positive, albeit below-trend, growth. The danger zone at this point would be a reading below minus 0.70, which would indicate “an increasing likelihood that a recession has begun,” the Chicago Fed advises. Such a dark sign, however, is unlikely in today’s release.

Economic growth is still moderate by historical standards, but considering the big-picture trend across a range of indicators still looks encouraging, as my latest monthly economic profile of the US suggests. The overall pace of the recovery is strong enough to keep the recession risk at bay, but slow enough to promote the debate about when the Fed will begin winding down its monetary stimulus program. Today’s CFNAI-3MO data will probably keep the level of uncertainty fairly high for guesstimating the timing for tapering by showing that economic growth rolled on last month but at a subdued pace.

US Johnson Redbook Sales Index (12:55 GMT): Consumers’ appetite for spending shows few signs of faltering, according to a number of indicators, including the weekly updates of the Johnson Redbook numbers. This measure of sales across a broad sample of retailers has moved higher in recent weeks on a year-over-year basis. That’s a clue for anticipating that the official August retail sales report from the Census Bureau (scheduled for release on September 13) will deliver another round of upbeat news.

Nonetheless, it’s still early for August data. Keep in mind too that the previous update on the weekly comparison for the Redbook index retreated by a fair degree. But without a confirming drop in the annual change of some magnitude, the case for optimism remains compelling. With that in mind, pay close attention to how today’s number stacks up versus the same period a year ago. As long as growth doesn’t dip substantially below the three percent mark, the outlook for moderate growth for retail spending in August overall remains on track.