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Economy in Brief

Euro-Area Looks Good But It’s Not to be Believed
by Robert Brusca  September 14, 2011

Strong rise in Euro-Area output : what’s up with that? Euro-Area IP ramped up sharply in July, a surprising development. Even so the three-month rate of growth is negative. But at -0.2% it is vastly improved from the three-month growth rate of last month which was at -3.1%. And even a -0.2% pace seems light years better than the PMI indices we have been seeing; better as well than the signals from other surveys from the EU Commission and other national sources. Of the major IP categories (consumer goods overall, consumer durables, consumer non-durables, intermediate goods and capital goods) only capital goods has a positive three-month growth rate. With the euro-area slowing, the US slowing, and China and India slowing, it’s hard to see how capital goods will lead the Euro-Area to salvation.

Inconsistent stories - The revival in German IP is one of the big stories in the Zone this month as it rose by 4.6% month-to-month in July. French IP rose by 1.5%, gaining back its 1.5% loss in June. Italy, Spain and Portugal saw monthly MFG output declines. While Ireland and Greece showed increases. The 9.4% spurt in Greece follows a 3.8% drop in June and leaves IP in a choppy seesaw pattern that is certainly overstated by seasonal adjustment especially this month.

More up than down in July still... Among the all EU member countries for which data are available, industrial production (overall) rose in fourteen, fell in eight and remained stable in the United Kingdom. The largest increases were observed in Estonia (+4.7%), Germany and Greece (+4.1% in both) and the Netherlands (+3.5%), while the largest decreases were seen in Slovakia (-3.4%), Portugal (-3%) and Slovenia (-2.2%).

Downplay the rise - Clearly there also are lots of cross currents in the data. This month’s rise is being downplayed even though it is a relatively strong gain of 1% on the month (12.7% compounded!).

Giving measure to the disconnect - The trends through July are seemingly unrelated to the trends in the report through June for similar horizons of comparisons (see table). Just for the sake of illustration I ran a simple correlation for the three-month annual gains across countries in the table for the month of July Vs the same statistic as of June. The correlation value was -0.17. That’s not just a low correlation but an inverse one (insignificantly different from zero, however). It says that the three month trends between June and July (which have two of three-months in common to the calculation!) are not just shifting but are closer to being unrelated (zero correlation) or opposite (negative correlation)! And that is pretty unbelievable, since if anything, based on events, conditions should have worsened not improved in July. Over six-months the same correlation technique improves to a correlation value of +0.59 (an R-squared value of 0.33). On that horizon the six-month annual growth rate is 1.9% in July compared to 1.2% in June. That sort of growth range makes more sense in looking at what the Zone is really turning out. Growth is positive but it is weak and it is very volatile to boot.

Quarter to date still some strange bed fellows - In the quarter to date, IP in the Zone is up at a 1.3% annual rate as of July. Obviously it is very early in the quarter. This statistic looks at the level of IP in July and calculates its annual growth from the middle of the previous quarter. On this method consumer goods output is falling at a 5.9% annual rate and intermediate goods output is up at a 1.5% rate. Capital goods output is surging ahead at a 15.5% annual rate which is faster than in any of the 3-mo, 6-mo or 12-mo growth rates ending in either June or July. That odd result also attests to there being something strange in the data in July.

Debt crisis is no positive in the outlook despite some ‘steps’ - Europe’s debt crisis is still in full bloom but policymakers are trying to prune it back. Moody’s has downgraded two large French banks and it may still have more downgrading to do. Apparently there is a proposal to poll the Euro-Area membership on a Euro-zone bond issue. Markets seem to like the fact of a proposal overnight but it’s unclear besides France (who is in it for 100% of whatever it takes) supports it. Of course, France is on board since its banks are riding in steerage. Sink the Greek ship of state and the French banks are the first men overboard and without life jackets. Moody’s rates them as poor swimmers.

Eurobond asks the wrong question first- I still think a Eurobond asks the questions in the wrong order: it’s not “Will you marry me,” and then “do you love me?” It’s the other way around. Before throwing ‘good money’ after bad you need to be able see the light at the end of the tunnel and the commitment through good times and bad. Because after you commit monies there will still be bad times. Kicking the can down the road because you think you can kick it again is six-month’s time or 12-month’s time is exactly what got US home owners in trouble as one day they went to kick and there was no can to kick but theirs. And boy did they get their cans kicked. Banks would not refi their mortgages. Banks would not extend them credit. The refi-game was up. Europe needs to be able to see the end game with Greece and Spain and Portugal and Italy for that matter (and Ireland!) before it floats debt which will give it not just skin in the game but a few appendages too.

Hold the same opinion long enough and you are bound to be right - While I think German intransigence has helped to make this whole thing worse, we are now where we are and from here it is clear that their reluctance to participate is on solid economic footing. Unless Europe has gotten to the point where each country will put all its chips in the pot and go for real unity, floating a Euro-Area bond that gives European pooled risk to the investor, funding to the borrower, and does so without any coordinated fiscal authority among the issuers who bear the repayment burden is folly. It seems the most foolish thing that it can do. The funders need commitment or leverage over the fundees. But that is not the way it is being done. There it is; just that idea of a bond float is being circulated and for a while markets seem to like it.

An Euro-Area bond is no pet rock - The pet tarantula may be a hit on the first day home from the pet store as well but that too can change as the family discovers how dangerous a pet it can be – possibly too late. Do you want it? Is it safe? Again questions in the wrong order.

Euro-Area MFG IP
SAAR Except M/M Mo/Mo Jul
11
Jun
11
Jul
11
Jun
11
Jul
11
Jun
11
 
Euro-Area Detail Jul
11
Jun
11
May
11
3Mo 3Mo 6Mo 6Mo 12Mo 12Mo Q2
Date
MFG 1.0% -1.2% 0.2% -0.2% -3.1% 1.9% 1.2% 5.3% 3.6% 1.3%
Consumer -0.4% -0.9% -0.2% -5.6% -1.5% 0.3% 0.8% -0.3% 0.4% -5.9%
C-Durables 2.9% -2.5% -0.5% -0.8% -8.3% 3.1% -0.6% 2.7% -2.2%  
C-Non
durables
-0.6% -0.8% -0.1% -6.3% -2.4% 0.2% 1.0% -0.6% 0.6%  
Interm. 0.8% -0.8% 0.0% -0.2% -3.6% 0.6% 3.6% 4.2% 3.0% 1.4%
Capital 3.0% -1.5% 1.2% 11.5% 1.8% 10.4% 0.3% 11.6% 7.3% 15.5%
Main Euro-Area Countries and UK IP in MFG
  Mo/Mo Jul
11
Jun
11
Jul
11
Jun
11
Jul
11
Jun
11
 
MFG Only Jul
11
Jun
11
May
11
3Mo 3Mo 6Mo 6Mo 12Mo 12Mo Q2
Date
Germany 4.6% -1.2% 1.5% 20.9% 1.1% 16.1% 7.5% 12.5% 7.8% 28.4%
France:IPx Construct'n 1.5% -1.5% 2.3% 9.3% -0.4% 1.7% 0.4% 3.7% 2.5% 7.7%
Italy -0.7% -0.4% -0.8% -7.3% -0.9% 1.8% 0.2% -1.0% 0.3% -7.1%
Spain -1.6% -3.3% 2.7% -8.9% -15.5% -12.8% -3.3% -3.0% -3.2% -16.4%
Ireland 0.8% -1.6% 0.6% -0.7% -0.7% -5.8% -5.5% -5.4% -3.6% -0.2%
Greece 9.4% -3.8% 1.3% 29.2% -27.2% -3.4% -21.0% -2.8% -13.3% 50.4%
Portugal -3.0% -3.2% 3.2% -11.9% -14.9% -7.8% -9.3% -4.6% -2.8% -22.2%
UK: EU member 0.1% -0.3% 1.8% 6.3% -0.9% -0.2% 1.1% 2.0% 2.2% 2.9%
Some Euro-Area reporters are timely and some lag. This table allows a sequential inspection of
trends regardless of topicality
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