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Economy in Brief

IFO Business Sentiment Reading is Still Sinking 
by Robert Brusca June 24, 2008

At the crossroads
The IFO business sentiment reading made a deeper Yr/Yr drop in June than in May. It has slipped to the 68th percentile of its range of values (range from 1992 to date). The current situation is not as glum a reading as it stands in the 78th percentile of its range; it is hardly beleaguered. Yet, it slipped in the month and was lower by 2.8% Yr/Yr, a bigger drop than May’s 2.1%. But it is the all-important expectations index that by its very nature is more forwarding looking and that is a cause for distress. This index fell by 7.9% Yr/Yr more than the 7.1% registered in May. Its June level stands at the 50.9th percentile of its range almost exactly mid range. The German economy is at the crossroads.

The diffusion values show widespread slippage in June with each of the major sectors lower in June than in May except for construction. The all-sector climate diffusion index stands at 1.7 down from 6.1 in May. It stands at the 85.2 percentile much like its pure index counterpart listed in the table above which is in its 68th percentile. The sector detail from diffusion data is the only sector detail available for now.

Climate by sector slipped to 8.2 from 15.0 in MFG dropping climate to the 61st percentile of its range. Construction is an odd case at a -18.9 actually stronger than May’s -20.2 and standing in the 74th percentile of its range. Despite the poorer absolute performances the construction sector is doing relatively better than MFG. Wholesaling index slipped to 2.1 from 4.0 falling to the 66th percentile of its range. Retailing registered a weaker -6.5 compared to -4.4 in May, a range reading of the 80.9 percentile again, an absolutely weaker sector with a relative standing that is better than the group average. Services fell to a +16.3 diffusion reading from +19.4 in May for a percentile standing of 72.4.

Since these are diffusion readings and span positive and negative values we cannot express drops from their peaks very effectively. But in terms of the range percentiles we can give some idea of the slippage. Most of these series peaked in Early 2006 or late 2007. Over this period each was at its own respective cycle high 100th percentile. So each index has fallen from 100% during this period to its current reading. These are large drops over a span of 18-months or less.

The net changes in these various indices the over 18-months are about half as large as the largest 18-month dropped ever experienced for all sectors for MFG and for wholesaling. For consumers the last 18 month’s drop is only one-quarter on the largest ever. For retail sales and services the drop is on the order of the fifth to tenth percentile of the largest drop. In terms of monthly variation the all-sector reading is 17% more variable over the past 18months than what is normal MFG is 11% more variable. Wholesaling is has been more variable. But construction has been 20% less variable retailing has been 15% less variable. Services overall have been 35% less variable. It has been a bit of a mixed bag but the German consumer and services sector has been clearly eroding but slowly while MFG has been slipping more rapidly.

What we have is an economy in transition with most of the transition coming from manufacturing and wholesaling (trade). The domestic retail construction and services industries aren’t really hit that hard although they have been slipping. With banks seeing some financial stress and turmoil we have to wonder how long before real estate gets hit since it is a troubled sector internationally and requires bank financing in most circumstances. Manufacturing shows weakness and the euro remains strong; how long before it begins to affect the consumer and services sectors? What of the eroding impact on the consumer of higher oil prices? The RTC/Reuters indices already how a bigger hit to services that does the IFO reading. Ultimately, it’s a question of contagion from a weaker MFG sector and a direct hit from oil.

IFO Survey: Germany
  Percent: Yr/Yr Index Numbers
  Jun-08 May-08 Apr-08 Mar-08 Feb-08 Current Average %tile
Biz Climate -5.3% -4.6% -5.7% -2.7% -2.8% 101.3 96.1 68.6%
Current Situation -2.8% -2.1% -4.2% -0.7% -1.1% 108.3 95.4 78.0%
Biz Expectations: Next 6-Mos -7.9% -7.1% -7.2% -4.7% -4.4% 94.7 97.0 46.3%
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