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Economy in Brief

Euro Area Orders Stabilize: A Leading or Misleading Statistic?
by Robert Brusca April 23, 2008

What is for real and what is whistling past the graveyard?

Tangled trends
Euro Area orders are up in February, making it a two-month gain following a dive in December. Still the 3-month growth rate is negative for orders at a -3.9% compared to an annual rate gains of 6% over six months and 6.6% over 12-months. So the sequential growth rates point to some sliding in growth despite recent two-month pickup.

Orders: the lagging leading statistic…
More to the point is the fact that the orders figures for the Euro Area are for February when many other series at the country level already are available for March. Survey data are beginning to come available for April as we saw in the release of the Belgian National Bank’s April index that plunged – ironically, led by weakness in orders. The Belgian index April result is nothing like the recent numbers we are seeing through April. Still, the BNB survey, truncated at February, would have been quite compatible with the figures in the table above. That begs the question of what the trend really is, doesn’t it? At the end of the month we we’ll get the comprehensive survey results for April that addresses the sectors of the Euro Area and EU from the European Commission. Based on the Belgian report we would seem to have a much darker set of trends that will be placed before us. Germany’s Zew index for April is already in hand and it shows a weakening in expectations to a very low level with some so-far minor weakness in current conditions. But this is a survey of expectations among financial experts. The upcoming German IFO report will survey the industrial and other sector participants directly about how their businesses are performing. .

The drop off in the Belgian index is still isolated but it is highly topical and reasonably comprehensive across sectors… and it is an index known to have leading indicator properties.

Whistling past the graveyard?
For my taste the smugness of the European reaction to ongoing growth there and the ECB’s stubbornness in ignoring the high euro exchange rate value in setting policy has been hard to stomach since this behavior has sent inconsistent signals to the markets. In looking at the euro historically –even extending the construction of a ‘synthetic euro’ back to the early years of fluctuating exchange rates- it is PAINFULLY clear how overvalued that rate has become – and not just VS the dollar! All the talk of how robust Germany’s economy remains in the face of this strikes me as akin to the Spartans swallowing their teeth to hide the fact that they have been injured. The index above is broad and inflation adjusted. It is the real deal showing ‘euro’ competitiveness at its lowest level in 36 years – or more. The ECB’s ignoring this clearly deflationary force in setting policy is similarly puzzling. The real, broad euro exchange rate stands nearly 20% above its average for the period.

Single mandate does not mean closed-minded
It does not matter if the ECB has a singular focus and mandate on inflation with no growth mandate at all. To crank rates up and to threaten to do it some more as temporary ‘inflation’ effects wash through economy when they ‘know’ there is a powerful deflation force at work (i.e. the overly strong euro) is not good monetary policy. The German government has long known its place in such monetary fights and has taken to extolling the benefits of a strong euro. I guess the response there is this: If you can’t beat ‘em, join ‘em. Thus the German economics and finance ministries seem in some way complicit with this policy of excessive anti-inflation zeal. It may be that ECB-types feel they have to lean hard against the unwanted advice urging flexibility from the IMF. The International Monetary Fund said Monday in its latest Regional Economic Outlook for Europe that the European Central Bank has some leeway to loosen its monetary stance. Today aft r the euro has screamed higher, the IMF’s John Lipsky has called euro monetary policy appropriate as it is. I don’t know if that will end this verbal silliness or not.

Right hand does not seem to know (or care?) what the left is doing…
So the economic growth/inflation outlooks and assessments have flies in the ointment. Unfortunately it seems that the more topical reports are the weaker ones. While the title ‘industrial orders’ sounds like a leading sort of barometer, no report is any fresher than the data it contains. If this one continued fish you would not touch it. The topical reports lead us to be cautious in the assessment of current trends. Germany and Europe have for too long been too resistant to the impact of a euro whose strength has been eating away ravenously at their competitive positive. The resiliency of the economic data has belied the urgency in the tone of policy makers who have sought some help in stemming the euro’s rise. But, in the end, you can’t have it both ways. If the euro is too strong it must do damage. If it does not, it is not too strong. If policy markers are going to extol the vibrant nature of their own economies as its fundamentals are being undercut surely they can expect no urgency to help them with their nonexistent FX problem!

Call to action: THINK!
Governmental and central banking policymakers must be on the same page and willing to look ahead if they are to foster a correct view of their economy. For the moment we continue to have the sort of fair-weather analysis from officials that we were spoon fed by commercial bankers over the previous year. We know what that is worth. It is a good time to look closely at the data yourself and remember the key constituencies of the policymakers that go public. I think we may be in for a rude awakening. But that’s only one man’s opinion. And economists are wrong at least as often as markets are… Who is ‘wrong’ now?

Euro Area and UK Industrial Orders & Sales Trends
Saar except m/m % m/m Feb-08 Feb-07 Feb-06 Qtr-2
Euro Area Detail Feb-08 Jan-08 Dec-07 3Mo 6mo 12mo 12mo 12mo Saar
Manufacturing Orders 0.6% 2.2% -3.7% -3.9% 6.0% 6.6% 7.0% 11.1% 2.7%
MFG Orders
Total Orders 0.6% 2.2% -3.7% -3.9% 6.0% 6.6% 7.0% 11.1% 2.7%
Countries: Feb-08 Jan-08 Dec-07 3Mo 6mo 12mo 12mo 12mo Qtr-2
Germany: -0.1% 0.1% -1.6% -6.5% 7.7% 5.9% 12.7% 12.3% -0.9%
France: 1.0% 4.1% -1.7% 14.2% 5.7% 9.7% 5.9% 4.7% 17.8%
Italy 2.0% 2.8% -5.2% -2.5% 3.9% 9.9% 1.6% 11.4% 5.5%
UK (EU) -13.2% 23.8% -6.3% 2.9% 4.6% 13.7% -7.5% 15.8% 81.3%
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