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Economy in Brief

Euro Area Industrial Production Rebounds
by Robert Brusca  September 15, 2021

IP overview
EMU industrial production rose by 1.5% in July after falling in May and June. The July gain is large enough to boost the three-month growth rate into positive territory and to create acceleration vs. its six-month pace (which is only slightly weaker at 1.0%). Still, IP is not yet on an accelerating path as both the three-month and six-month growth rates are well below the expansion pace of 7.4% over 12 months.

The trend
But because there was only a small dip in June and a surge in output in July as Q3 started, the quarter-to-date growth rate for the third quarter is at a strong 6.4% pace early on. Putting this is a broader context, IP is up by only 0.4% since January 2020 just before the virus struck. That is only a very small gain over those next 18 months. It signals output is back to where it was a year and one-half ago. Still, there has been a lot of lost output in the interim period and IP is well below where trend would have taken it had IP continued to expand over the period. It is far too soon to say that IP has returned to normalcy, but the strong growth early in Q3 is a good sign.

Manufacturing sector
Manufacturing echoes the developments in overall production but with slightly more growth overall. Manufacturing is growing at a 3.1% annualized pace over three months and does accelerated vs. its six-month rate of growth. Still, there is no ongoing acceleration for manufacturing as year-on-year growth of 8.4% dwarfs both the three-month and six-month rates of growth. Manufacturing IP is up by 0.8% from its January 2020 level.

Consumer goods output and intermediate goods output has much the same recovery but have different paths over the past year. Capital goods output has been and continues to be weaker except to start the new quarter.

Consumer goods output trends
Consumer goods output rose by a sharp 3.2% in July and has risen strongly in two of the last three months. It has double-digit growth over three months, six months and 12 months but not on an accelerating path. Consumer durables spending has been up for four months in a row. Consumer spending on durables rose by 0.6% in July. Over the past year spending on consumer durables is up by 10.2%. That pace drops to 6.9% over six months and picks up to 9.0% over three months. Consumer durables spending is up at a 7.2% pace early in the third quarter. Consumer nondurables spending is up in two of the last three months surging by 3.5% in July. As a result of that surge, three-month nondurables spending is up at a 13.9% pace over three months, a step down from its 18.3% pace over six months but above its 10% gain of 12-months. Spending on consumer nondurables is up at a 26.5% pace in the quarter-to-date.

Intermediate goods output trends
Intermediate goods output is weaker sequentially than consumer goods spending as it is actually on a decelerating profile. Intermediate goods output rose in each of the last four months, but it logged a gain of only 0.4% in July. Its sequential growth rates cool from 11.3% over 12 months to 2.7% over six months and to 2.3% over three months. In the quarter-to-date, intermediate goods output is growing only at a 3.1% annual rate.

Capital goods output trends
Capital goods has been the lagging sector in production. Output is up by only 5.4% over 12 months and then it is declining over both six months and three months. Capital goods output did gain by 2.7% in July but that followed two months of declines. Because of the jump in output in July, capital goods output is up at a 6.4% annual rate early in Q3 over its Q3 level.

Sector output since Covid
Since January 2020, capital goods output is still lower by 3.1% intermediate goods output is higher by 2.9% and consumer goods output is higher by 5.5%. Consumer durables output is 4.1% above its January 2020 level while nondurables output is higher by 5.7%.

Summing up
On balance, IP is turning in a good performance in July across the board. The EMU Markit manufacturing PMI shows a slowdown in July against a speed-up in June and slowdown in May. Although the PMI has been herky-jerky on acceleration, it has signaled continued solid-to-strong growth with a four-month average manufacturing PMI reading above 63. Still, it is sequentially higher rising in three-months compared to six-months and in six-months compared to 12-months. It has a strong increase in its diffusion value of 31.1% compared to its January 2020 level. The third quarter is getting off to a strong start, but there are still issues about how the Delta variant will affect growth and output in the quarter. While IP is on a relatively strong path, its performance over the last 18 months has been lackluster. July was a good month. But can output keep it up?

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