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Economy in Brief

IFO Shows Slowing in September
by Robert Brusca  September 24, 2021

The IFO climate index backtracked, falling to 16.0 in September from 18.3 in August. The climate gauge has been easing for several months now. Expectations and the current business situation also moved lower this month following in their own separate trends of declines over the past several months.

Despite the recent cooling trend and cooling is all that it really is, the IFO gauge remains in firm-to-strong territory. The climate gauge has an 86.9 queue percentile standing on data back to 1991. Current conditions have a firm 67.7 percentile standing, a more modest but still firm reading.

Expectations, however, are not as robust. At a 35.8 percentile standing, the expectation reading is below its historic median (queue standings put the median at a ranking of 50). So, a headline with a standing in the 35th percentile is decidedly below par. Expectations are essentially at their midpoint for manufacturing and the have climbed to an above-median value of the 68th percentile for construction. All other industries are well below their historic midpoint reading for expectations.

On the climate gauge, all industries are above their respective medians except services that cling to a low 35.3 percentile standing. Construction, manufacturing and retailing have percentile standings in their 80th percentile decile range.

The current business situation shows some of the strongest industry rankings with construction, wholesaling and retailing all in the 90th percentile decile. Manufacturing has an 84.3 percentile standing. But even here, current business conditions in the services sector are a laggard with a 28.4 percentile queue standing.

Services are lagging as the Delta variant has spread and put many people into a defensive posture, keeping them at home or having them transact warily in the service sector economy, a sector that typically requires some personal contact and engagement.

We can also evaluate the German sectors with reference to how they have evolved since the virus struck. The far right-hand column in the table compares the industry reading on all three metrics to its value in January 2020 before the virus struck. Climate is up by 14.9 diffusion points on that comparison while the current situation is up by only 1.9 points and expectations are up by 10.3 points.

However, the differences by industry are striking. Under climate, manufacturing is up from its January 2020 level by 22.1 points followed by wholesaling that is up by 11 points. The remaining categories are still not recovered to their January 2020 levels with services weaker by a thin 0.1 point, retailing lower by 0.4 points, and construction lower by 2.5 points.

Current conditions show the most strength in manufacturing again; that industry is up by 27.8 points from January 2020 and wholesaling is up by 16.9 points. Retailing is up by 0.7 points. Construction is still net lower by 8.1 points and services are lower by 13.9 points. The current economy only shows three positive legs with the services sector still lagging badly after 19 months.

Expectations, with such weak queue standings, show somewhat better-seeming results in terms of changes since January 2020. Once again, manufacturing expectations are up the most with a gain of 16.8 points. But services, despite their weakness, are still 12.1 points above their January 2020 mark. Wholesaling and construction expectations also are higher. But expectations for retailing are lower than they were in January 2020.

On balance, the IFO survey shows a great deal of economic irregularity. It does drop into a pattern- a familiar one at that - with manufacturing leading the way on all metrics and services generally lagging. But expectations in services have moved up and service sector expectations were one of the few to show higher readings month-to-month in September. Still, there is a long way to go. And no one knows how much virus fighting lies ahead.

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