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Economy in Brief

IFO Detail Fills in the Missing Pieces for Germany’s Trends…Strong but Slowing
by Robert Brusca July 31, 2007

The main IFO gauges show that while the current readings for IFO are still very strong, the current indices are trending lower. As index numbers the index for expectations hit a bit of a ceiling and has formed what is essentially a double top. Expectations rarely get much stronger than an index reading of 105. The accompanying chart shows these indexes as percent changes and the downward slide of momentum is apparent.

Now, as the IFO gauges began to poster lower numbers, we look to see what the detail of the IFO report tells us about that step-back.

In terms of Y/Y percentage changes the current situation index continued to rise. However MFG is now lower Y/Y as it has been for two months running. Not shown in the table below is the detail for wholesaling which has fallen for the second straight month or construction, now off for three months in a row. Retailing is up in July after being off Yr/Yr in June.

Expectations are off across most main sectors with the MFG index off by 0.5% Yr/Yr and off on that basis for five of the past six months. Wholesaling expectations are off for one month in a row; retail is off for three months in a row and for five of the past six months.

Within MFG the overall sector shows a decline in activity Yr/Yr and that decline is seen in intermediate goods and consumer goods but capital goods activity rebounded in July after having made its first Y/Y drop in June.

Assessments of demand for MFG sectors are dropping in most sectors and have been dropping for five months more or less. The exception is the consumer sector where demand is seen as up in July; it was also up in May.

Also in MFG, orders on hand are somewhat mixed. The total is lower Y/r (-2.7%). But that is mostly weakness in intermediate goods since capital goods orders and consumer goods are still growing.

Foreign orders continue to grow, by 1.9% in all of MFG but intermediate orders are off. Foreign capital goods orders are up strongly but are slowing their rate of ascent; consumer goods orders are flat.

The outlook for three months ahead (bottom panel of table) is still mostly positive, but with some mixed trends. MFG export expectations are flat, despite good orders responses above. Orders expectations for retailing are on a long string of declines although the pace of decline is withering. Wholesale orders are positive but their strength is withering. Export expectations for three months ahead have turned flat for manufacturing in July. Employment expectations over the next three months do continue to be upbeat.

The German economy still is emitting a lot of very positive signals. However do not get lost in the high level of the indexes since they are also losing momentum. While retailing seems to be one improving sector its ability to offset slippage elsewhere has not been established.

IFO Survey: Germany
  Percent: Yr/Yr INDEX NUMBERS
  Jul-07 Jun-07 May-07 Apr-07 Mar-07 CURRENT Average Curr/Avg Percentile
Biz Climate 0.7% 0.2% 2.8% 2.6% 2.1% 106.4 95.7 111.2% 90.3%
  Current Situation 2.4% 1.7% 4.7% 6.3% 6.7% 111.3 94.7 117.5% 87.6%
Biz Expectations: Next 6-Mos -0.9% -1.2% 0.9% -0.9% -2.3% 101.8 96.7 105.3% 82.9%
  Jul-07 Jun-07 May-07 Apr-07 Mar-07 CURRENT Average Curr/Avg Percentile
Current Situation
  MFG 4.5% 4.4% 6.6% 7.6% 9.4% 111.3 92.2 120.8% 95.3%
Biz Expectations: Next 6-Mos
  MFG -0.5% -2.8% 0.9% -1.4% -3.0% 100.9 96.4 104.7% 79.1%
Activity (m/m)
  MFG -1.8% -3.7% 2.0% -0.5% 0.4% 102.9 96.9 106.2% 77.8%
Demand M/M
  MFG -3.3% -7.1% 0.4% -3.6% -1.7% 101.2 97.0 104.3% 68.5%
Orders on hand
  MFG -2.7% -3.6% -0.9% -3.0% -2.7% 104.0 96.4 107.9% 79.0%
Foreign orders on hand
  MFG 1.9% 2.0% 2.5% 1.9% 5.4% 111.5 94.2 118.3% 96.5%
Yr/Yr percentage changes in underlying Indices
IFO outlook for 3-Months ahead
3-Mos ahead Percent: Yr/Yr INDEX NUMBERS
Expected Activity Jul-07 Jun-07 May-07 Apr-07 Mar-07 CURRENT Average Curr/Avg Percentile
  MFG 1.0% 3.4% 0.5% 0.7% -1.6% 103.0 96.7 106.5% 94.0%
Orders expectations
  Retail Order Expectations -1.2% -10.8% -4.6% -10.9% -10.0% -11.6 -17.5 66.5% 70.6%
  Wholesale 0.7% 5.7% 15.7% 15.0% 10.7% 7.1 -14.0 -50.7% 83.1%
EXPORT Biz Expectations
  MFG 0.0% 0.4% -0.5% -1.1% -1.9% 103.5 98.3 105.3% 89.4%
Employment Expectations
  MFG 7.4% 8.4% 7.5% 6.4% 8.2% 105.9 95.9 110.4% 100.0%
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