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Economy in Brief

German orders surprised us with a sharp slide in the first month of the new quarter. As the chart shows the sharp monthly drop offsets a pervious surge in orders. Indeed in the third quarter to date orders are falling at a -17% annualized rate (July/Q2-annualized). That Q3 drop compares to an actual quarterly gain of 18%: both figures are compounded and annualized, as are those that follow in this section. Foreign orders are off the hardest, dropping at a 27% pace in Q3 to date compared to an actual annualized rise of 29% in Q2. Domestic orders are off at a 4.7% pace in Q3 compared to an actual rise at a 7.7% in Q2. For the most part Q3 is starting off with the surge from Q2 running off. Further declines will be needed in Q3 to keep these annualized growth rates this negative. In other words, if orders flatten where they are now, the negative annualized Q3 growth rates will increase in absolute value (diminish their downdraft). 

Month to month falls…
Geographic detail shows us that foreign orders have fallen by the most within the Euro area. There, orders are off at 21.7 percent rate m/m after a 22.4% m/m spurt in June. Most of the unwind is in capital goods. But the drop spans categories. Foreign orders outside the Euro area also fell but by 1.9% after falling by 0.9% in June as well. The July drops were located in consumer durables and basic goods; capital goods orders continued to rise, albeit slowly.

Intra Euro area trade issues.
The Euro backed off after this report. But as we can see the main German weakness was in its intra-Euro area export sales. These are that odd brand of exports that have no direct exchange rate consequences. German exports to France (for example) may compete with the French-made goods but they are using the same currency! Still to the extent that the euro rises and Germans lose competitiveness because of it, the loss is not Vis-à-Vis French producers, but to other non-euro members like US exporters. So a strong euro might cost Germany some of its export market in France as US exporters benefit. It is not that there are not exchange rate consequences for these intra-Euro area exports, but that they are of a third party nature through what economists call cross price elasticities of demand.

The likely facts…
Germany’s order weakness in other non-euro markets are much more tempered making the drop in intra-Euro orders look less like they are due to sudden exchange rate related losses than just due to the variability of bulk orders. Still there remains the questions of trend for German orders. 

The question of trend…
Despite the variability in orders, German orders are lower (annualized) over three months than they were over the past year or even the year before that. Is the German growth machine starting to slow and is this a problem since the consumer has not kicked in and since, with the new financial hit, the consumer might remain more cautious and even capital equipment demand could soften? That appears to be where the risk is going. These are trends to stay plugged into. We will follow them closely as European growth may depend on them.
German Orders and Sales By Sector and Origin
Real and SA % M/M % SAAR
  Jul-07 Jun-07 May-07 3-Mo 6-Mo 12-Mo YrAgo
Total Orders -7.1% 5.1% 3.0% 2.2% 1.1% 6.1% 8.0%
  Foreign -11.7% 9.4% 4.1% 2.2% 1.1% 5.5% 10.2%
  Domestic -1.7% 0.4% 2.0% 2.5% 1.3% 6.8% 5.7%
Sector Sales              
MFG/Mining 0.1% -0.5% 2.5% 8.7% 4.3% 5.8% 6.8%
  Consumer Goods -1.6% -1.3% 1.4% -6.0% -3.0% 1.9% 2.1%
  Consumer Durables -0.8% 1.8% 2.3% 14.1% 6.8% 5.4% 4.3%
  Consumer Non-Durables -1.8% -1.9% 1.4% -9.1% -4.6% 1.3% 1.7%
Capital Goods 1.9% -1.5% 4.4% 20.6% 9.8% 7.5% 8.1%
Intermediate Goods -1.1% 1.1% 1.3% 4.7% 2.3% 5.9% 8.1%
MFG 0.1% -0.4% 2.5% 8.8% 4.3% 5.6% 6.3%
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