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Economy in Brief

German IP Trends Sour...And That's Not All As The G-20 Meeting Gets Ready To Get In Gear
by Robert Brusca   November 08, 2010

Germany rules or drools? This month we saw the bottom suddenly fall out of German orders with especially weak results visited on German export orders. While the German trade picture seems to have held up in September Germany's industrial output is dropping off with weakness in its most important sectors. Still, through the third quarter output seems to holding up as we can see the total IP index is rising at a 6.5% annual pace in Q3 compared to Q4. That is more than just 'respectable.' But that is slower than its six-month pace and slower than its 12-month pace. Moreover, if we calculate a simple three-month growth rate, (instead of a quarterly rate based quarterly averages of output) the pace of IP expansion slows to 3.9%. IP has dropped by 0.8% in September to damp that result. That will send the output numbers for Q4 off on a very weak footing.

In transition - Sectors show that IP growth has slowed from a Yr/Yr pace of 9.3% for capital goods to 6.7% over three months. For intermediate goods the pace of output has fallen off sharply from 11.5% Yr/Yr to flat over three-months and to a decline in the most recent month. While the consumer goods sector has the smallest Yr/Yr growth rate at 2.4% it has been inching up to 3.6% over six-months and 3.2% over three months. Even consumer goods output fell over the recent month and by a relatively sharp 0.6%.

The vaunted German economy is sucking wind...by choice - On balance German IP and Orders point to more weakness ahead. Meanwhile Germany's financial minister is busy being critical of US QE policy. German Finance Minister Wolfgang Schaeuble has called U.S. policy "clueless." I suppose in a world where demand is faltering, austerity is the right contribution for a strong economy like Germany to make to the world's needs? I suppose that austerity coupled with export led growth is a way to argue that you are not running a beggar-thy neighbor policy? You may suppose with all this commentary I really have no clue how Germans think about policy or even if they do. Their responses seem Pavlovian to me.

Global reach; local thoughts - Germany has not had to think like a world power for some time. Its focus is narrowly on its own economy subject to the constraint of a very fiscally conservative population. Its only recent flirtation with excess was for the financial decision that would reunite Germany in the post war period; that was a quid pro quo for the formation of the Euro-Area itself. So Germany always has made policy for Germany and it seems to have not a clue as to what policy might make world growth better and how a policy of enlightened self-interest might even produce better results than its own closed-minded and nearly closed-economy way of thinking. Germany's idea of international commerce is to spread its notion of fiscal conservatism while its own economy leaps ahead on the back of export-led growth and develops a problem employing an immigrant culturally diverse workforce to fuel its own growth. It's hard to see how this is an improved model on what the US is doing. 'Clueless' would seem to apply with greater precision to Germany's choices than to those made by the US. German polices are more likely to engender negative repercussions for Germany than are US policies likely to generate negative repercussions for the US.

Too much nothin'? Germany's influence on events at the earlier G-20 summit should not limit what this summit puts on the menu in Seoul. Let's hope that Seoul food is more nourishing. Many countries are angry with US QE. But QE is simulative and that is good; QE has been bad for the dollar and that is good too. It is not just good for US exports and trade but it is good because with such a large current account deficit that is what the dollar is supposed to do- it is supported to fall. No one seems to be able to grasp that. For so long developing economics have had their way with the dollar exchange rate. They assume that is their right. But persistent current account deficits leach the US of its wealth and eventually it's like a patient giving too many blood transfusions to help someone else. The rest of the world needs to get itself in balance. Balance isn't just selling scads of stuff to US consumers. Can anyone be surprised that a policy of over selling to US consumers led to a policy of over lending to them (how else could be sustained/) and helped to foster the financial crisis? So a policy that begins to break that cycle (QE and its impact on FX) is good for all. Still, it's not surprising that some do not want to take their medicine.

From kaput ideology to Oktoberfest - The US cannot continue to run endless deficits with the rest of the world. It is time for the G-19 members to stand on their own 38 feet. It is time for some multilateral thinking that does not involved how to game the system. It is time for China to appeal to its better half to help its lesser half. Perhaps it is time for it to put some of that huge mound of FX reserves to work in developing its less developed regions. There are many things the G-19 can do and take control instead of blaming the US whose polices are right now about optimal for it, given the various constraints. The US faces its own economic and political constraints and Greece has highlighted some of them and sent a warning shot across the bow of those pursuing policies of excess. You may be surprised for me to admit that I see the German point; but standing on the brake in the fast lane of the freeway is not the solution. The weak dollar is not only a side effect it is a reality of the times and a part of QE. It is far from clear that sweeping it way would be better for the G-19. It also is nearly undeniably true that any more German influence on policy at this summit could deal a severe blow to the incipient global recovery. So what's it going to be? Will the US be embraced or rejected? Will the US policy open eyes as to what global needs really are? Or will we continue to be disciplined by Germany's policy of keeping our eyes wide shut?

Total German IP
Saar Except M/M Sept 10 Aug 10 Jul 10 3-Mo 6-Mo 12-Mo Quarter-
2-Date
IP total -0.8% 1.5% 0.2% 3.9% 9.4% 7.9% 6.5%
 Consumer -0.6% 0.7% 0.7% 3.2% 2.6% 2.4% 6.4%
 Capital 0.0% 2.3% -0.7% 6.7% 12.5% 9.3% 9.2%
 Intermed -2.0% 1.7% 0.4% 0.0% 10.8% 11.5% 6.2%
Memo
Construction 0.4% -0.2% 1.1% 5.0% 2.0% 4.6% -0.3%
MFG IP -0.9% 1.9% -0.1% 3.5% 10.4% 8.7% 7.7%
MFG Orders -4.0% 3.5% 0.0 -8.5% 9.2% 13.9% 6.9%
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