Haver Analytics
Haver Analytics

Economy in Brief

  • German industrial production rose by a sharp 1.2% in May but only after a 1.6% plunge in April which followed a 2.3% surge in March. This has been an unusually turbulent period for industrial production. However, on balance, German IP shows acceleration (from 12-months to 6-months to 3-months) for headline IP, for consumer goods output, for capital goods output, as well as for manufacturing overall and for real manufacturing orders.

    Data trends This collected pattern of accelerating trends is exceptionally good news and tends to push the volatility in output into the background. Typically, volatility tends to reduce the meaning of any trend since depending on where you are in a volatility, up-vs-down pattern, the trend will be not just exaggerated but even switched in direction. However, with not just growth but acceleration in play and with accelerating trends in play for so many categories- including real orders- the uptrend appears to be solidly established even in the face of volatility. And the chart seems to confirm that (drawn on year-over-year sector trends).

    Knowledge beyond data In addition, we know that there are other conditions stirring in Europe that give us cause to think that output solidifying is a real event not just the luck of the draw on one month’s volatility. The shift is to get NATO countries to pay for more of their own defense and to pay more period. At the recent NATO meeting, member countries pledged to spend 5% of GDP on defense that should help to light a fire of demand across Europe. At the same time, the good news is that inflation headlines in the EMU and across major member countries are mostly on target while core inflation remains stubborn at an elevated pace near 2.5%, mostly across the EMU.

    Quarter-to-date (QTD) The volatility leaves German IP growing at less than a 1% annual rate in Q2 over the Q1 average (quarter-to-date, or QTD)– a far less portent reading than the three-month rate of 7.7% (saar). But manufacturing, unimpeded by the weakness in construction, shows a QTD annual rate rise of 2.9%. Real manufacturing orders are advancing at a 16.4% annual rate in the quarter while real sales are declining.

    Surveys show improvements over three months compared to six-months, but all of them also show some slippage over six months compared to 12-months. Yet, all of the three-month averages are above the 12-month averages. Survey data generally show momentum is turning higher, but not markedly.

    Queue standings – longer term comparisons The queue standing data compare current growth rates (Y/Y) or (in the case of surveys) levels to past performance. Total IP, consumer goods, capital goods, manufacturing output, and real orders all have May readings above their historic median growth rates/or levels (rankings over 50%). But construction and intermediate goods sectors lag badly. Real sales are weak, and the surveys all show weak signal compared to all levels since January 2000. This tells us that the momentum in German industry (12-month growth) is solid and strong, but that the level of activity is weak – and quite weak- compared to past performance. This is also clear from the far-right column that measures current output relative to output in January 2020, just before Covid. These are aggregate changes. Germany’s output is still 1.7% lower in May 2025 than it was in January 2020 – nearly five- and one-half years down the road. This has been a very weak period for Germany. Only capital goods output among sectors is higher, rising by 4.9% over a period of five-plus years and making most of that in the last 12 months. The surveys show conditions have weakened on balance over this period as well.

    Some other Europe Portugal and Norway give us a look at two other European economies. Both show growth in May as well as QTD. Norway is supercharged with the strong oil market in play as a tailwind. Its queue standing for growth has a 99-percentile reading. Both Portugal and Norway are stronger relative to January 2020; Portugal by 11.8% and Norway by 8.3%.

    • Job growth improves with strength in state & local gov’t hiring.
    • Earnings gain decelerates.
    • Jobless rate falls to four-month low.
    • Trade deficit widened in May on decline in goods exports.
    • Still, the real deficit in April/May points to net exports making a meaningful positive contribution to Q2 GDP.
    • Both exports and imports declined in May.
    • Series low trade deficit with China.
    • Initial claims for unemployment insurance declined by 4,000 in the week ended June 28.
    • Total number of beneficiaries was unchanged in the week of June 21 week.
    • The insured unemployment rate was unchanged at 1.3%.
  • Financial markets have remained generally buoyant in recent days, with global equity indices advancing on the back of relatively upbeat global growth data, benign European inflation readings and the prospect of further policy easing from major central banks. At the same time, the US dollar has continued to weaken, reflecting a run of disappointing US economic data and rising investor concerns about the fiscal outlook, even as European growth surprises have turned more positive. This divergence, combined with the prospect of lower US policy rates relative to some (though not all) peers, has added to the dollar’s drift lower (charts 1 and 2). Supply chain strains—highlighted by elevated vessel queues at US West Coast ports—also feed into the narrative that US tariff measures may be contributing to sticky input costs and stagflation risks (charts 3 and 4). Meanwhile, record temperatures in parts of Europe this week have reinforced the climate challenge facing policymakers, with the final two charts illustrating how rising global temperatures and heat stress could increasingly weigh on productivity and growth potential if left unchecked. With trading volumes light ahead of the July 4th holiday and markets awaiting tomorrow’s US non-farm payrolls report, the interplay between softer US data, resilient equities, a weaker dollar, and climate-related risks remains firmly in focus.

    • Employment declines in several service industries; factory & building industry jobs rise.
    • Wage growth moderates further.
    • Small- & medium-sized shed jobs.
    • Purchase applications edge up 0.1% w/w; refinancing loan applications jump 6.5% w/w.
    • Effective interest rate on 30-year fixed-rate loans drops to 6.97%, the lowest since the Apr. 4 week.
    • Average loan size rebounds to the highest level since the May 9 week.
  • The EU unemployment rate fell to within a tick of its all-time low in April at 5.9% and stayed there in May. In the European Monetary Union (EMU), the unemployment rate in April fell from 6.4% in March to 6.2% in April, its all-time low; then in May it ticked up to 6.3%. This can hardly be construed as a weakening of the European labor market.

    At the same time, the EMU HICP has registered 2% growth year-over-year in June. In May it was at 1.9% with the core up at a 2.4% rise year-over-year. In June, Italian and Spanish core readings are 2.1% and 2.2%, respectively. In Germany, ex-energy inflation is at 2.5%. The core for the EMU is not yet available but clearly inflation, broadly considered, is very close to touching all the bases the ECB wants it to touch. And at the same time, Europe’s rate of unemployment is at or near all-time lows at least since the EMU was formed. That looks almost like policy nirvana.

    The Monetary Union is experiencing low inflation rates even for those countries (largely Mediterranean countries) that had stubbornly high inflation rates in the past. Interestingly, those formerly high-inflation countries have substantially reduced their rates of unemployment. In the U.S., it was the long low, extra-low, inflation span after the Great recession that brought the inflation rate down slowly but eventually to 50–60-year lows. The U.S. rate got to 3.5% under Trump and briefly to 3.4% under Biden. Now with similar inflation progress -and for the EMU, there is a long train of progress not looking just since Covid but looking at the collective progress since the EMU was formed.

    Among the 12 EMU members listed in the table, only three Luxembourg, Finland, and Austria have unemployment rates above their median rate compared to data since 1994. Spain’s unemployment rate is still in double digits at 10.8% but is much lower than it used to be. The Greek unemployment rate is at 7.9%; Portugal’s is at 6.3%. Spain’s unemployment rate is in the 15th percentile of its ordered queue of rates; the Greek rate has been lower only 3% of the time; in Portugal, the current rate has been lower less than 20% of the time. Low inflation and low unemployment go hand in hand. But when they diverge, the solution is not to coddle unemployment. It is to backdown inflation to allow the economy to move forward thereafter and prosper with lower inflation and lower unemployment in the future. I don’t think this lesson has been broadly enough learned, but looking at Europe and the U.S. the lesson simply presents itself with exceptional clarity.