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Economy in Brief

Domestic German Orders Show Surprising Strength
by Robert Brusca  February 4, 2022

German domestic orders jumped in December, rising by 11.7% month-to-month (yes, that's month-to-month) and driving the year-on-year gain to 11.0%. This result compares to foreign orders that fell by 3.0% (after a strong 6.5% gain in November and an 11.3% plunge in October) as foreign orders are up over 12 months by just 2.1%.

Foreign orders show sequential deterioration with the annualized growth rates falling from 2.1% over 12 months to -2.4% over six months to -29.6% over three months. Foreign orders in addition to this secular deterioration have become extremely volatile in the last few months.

Domestic orders, in contrast, have no trend and are simply volatile. They are very strong in December, and they impart that strength to the three-month growth rate that surges at a 73% annualized rate. That is up strongly from -5.8% over six months and that was a deceleration from +11% over 12 months. By tenor, domestic orders slow then surge – no trend there. We do not know whether to treat this month as a one off (probably) or as the start of a new, stronger, trend (possibly).

Volatility was up, fell back, but is rising again
The data on volatility show that the standard deviations of month-to-month percentage changes in foreign vs. domestic rates of growth have been highly correlated since late-2018. The correlation coefficient over that period (run on overlapping 12-month periods) is 0.972 (R-square of 0.945). Both series show a sharp ramp up in volatility starting around March 2020, peaking around June 2020, and holding at that very high level until March 2021. Volatility fell to a low in July 2021 and since then volatility is up again by about 85% from its recent low. That 'low' was still more than 100% above the sorts of volatility numbers that had been generated (which were very stable for both foreign and domestic orders) prior to Covid striking. Current foreign volatility has crept up higher than domestic volatility (despite this month's 'appearance'). Prior to Covid striking, the volatility of foreign orders was steadily and consistently higher than that for domestic orders by about a factor of 100%. That relationship appears to be in the process of being returned but with both volatility measures at a higher level.

With higher volatility, the signal to noise ratio falls. It will be harder to detect changes in trend and we will have more instances of spikes that are large and that are meaningless as they go away in future months. From April 2021, the percentage gain in foreign orders led the order parade with few exceptions but in December that is switched. Will it stay that way or is this just the result of volatility? In fact, since January 2008, foreign orders (based on year-over-year growth) have been stronger than domestic orders 63% of the time. And foreign order growth year-on-year seems to be weaker than domestic order growth (correlation coefficient 0.61) when overall order growth is negative. So, this inversion of strength between domestic and foreign orders may also be a signal of developing weakness even though orders are still up year-on-year. Remember that foreign orders are trending weak.

These correlations are 'interesting' for several reasons. Germany has the largest economy in the EMU. A large proportion of German exports stay within the EMU block. This month, orders from within the euro area fell by 4.2% with orders from outside the zone falling by 2.3%. While German domestic orders were strong- in an economy that is very export-dependent and sells a lot within the EMU as well - orders from EMU trade partners were weak. This confluence of relationships seems to ensure that domestic and foreign order series are not going to drift to far apart except in the short run, as they have done this month.

As for product type in December, consumer goods orders rose by 5.3%, intermediate goods orders rose by 4.1% and capital goods orders rose by 1.8%.

Real sales data in the bottom panel of the table show manufacturing sales rose by 0.2% on the month and those sales have been expanding at steady and strengthening rates from 12-months to six-months to three-months. In fact, the component sales data all show sequential acceleration except for consumer nondurables goods (and they pass that exception on to total consumer goods) as consumer durable capital good and intermediate goods sales all show sequential acceleration. All the accelerating series show power gains over the recent three months

The industrial sector data from the EU Commission on Germany, France Italy, and Spain – fellow EMU members- shows all of them with accelerating industrial sectors despite the drop in foreign orders and the weakness in the EMU-only orders.

Quarter-to-date (QTD)
QTD orders show a strong 8.6% gain as the quarter finishes with foreign orders weaker, falling at a 3.9% pace and domestic orders popping at a 28.8% annual rate. Real sector sales show huge gains in manufacturing led by a very strong rebound in capital goods for the quarter and followed by a double-digit growth rate gain from intermediate goods.

Pre-Covid comparisons
Comparing sales and orders to their pre-Covid January 2020 levels finds domestic orders up by 15.4% with foreign orders up by only 0.9%. Real sales are lower by 2.4% in manufacturing with shortfalls all around except for consumer durables and intermediate goods.

EU Commission index
The EU Commission indexes show strong queue standings in December in their upper 90th percentiles for the most part for the industrial sectors of Germany, France, Italy, and Spain. All these metrics show double-digit gains from their January 2020 levels. Germany leads the group with a gain of 38.1 points; the rest show gains of from 10 points to 15 points.

Summing up
On balance, the orders numbers come and go and always fluctuate. Fluctuations are and have been larger even though the tendency has settled down a bit. The foreign sector is trend-driven and there is slowing in progress. The domestic order bit is less well defined and there is no trend although there is a surge in orders in December and in Q4. That surge stands alone. The EU Commission industrial indexes show strength in industry for Germany and across the largest EMU members in general. Despite falling EMU-area orders in December, the sector in the EMU seems quite solid. Of course, Covid with the new Omicron variant is a factor. Maybe as this infection wave - which is already dissipating- continues to dissipate we will see more growth in industry and more growth in industry that is supported by services, the sector that tends to get his hardest by the virus. There seem to be some mixed trend and signals in the offing here. But eventually German foreign orders and EMU industrial trends need to come together.

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