Euro-Area Orders Defy Gravity...But Growth Slows Nonetheless

Growth surprise in orders - Industrial orders in EMU surpassed expectations in June as May's 4% order surge was followed by a 2.5% gain in June. Still April saw a fall of 0.2% and that took the top off of the three-month growth rate which 'settled down' to a 28.4% pace from 45.3% for the three-month period ended in May, just one month earlier.

Somewhat convoluted signals - Both foreign and domestic orders have ratcheted sharply lower over the three-months ended in June compared to the three-months ended in May. Some of this is due to the peculiarity of those particular periods as 6-month growth rates that are just one month apart (one ending in June, the other in May) are much more similar with domestic orders weakening and foreign orders actually stepping up a bit. But the year-over-year growth rates that are separated by only one month do show a more decisive decline in their rates of growth for both domestic and foreign orders (see the table and plotted data in the chart). Still, excluding orders for heavy transport equipment, which tend to be bunched and to distort underlying trends, overall new orders did rise by 1.6% in June from May.

Growth warning - Nobel Prize-winning economist Joseph Stiglitz, in an interview today, said that the European economy is at risk of sliding back into a recession as governments step up consolidation efforts.

Signs of slowing are sprinkled about - All eyes are focused on the most recent market data where signs of slowing seem to be 'everywhere.' The more timely and cyclically sensitive PMI surveys form Markit released yesterday showed that both services and manufacturing industries were losing some upward thrust. The manufacturing index from Markit dropped to 55.01 in August from 56.69 in July and shows a weakening trend on that gauge that is even timelier than orders. The warning by Stiglitz is that premature austerity could tip the region back into recession. The message from the data is that growth is no longer accelerating but that growth is still in train. Will the growth slowdown overshoot? It's too soon to tell but there are waning signs and risks.

Related signs of slowing - Drilling below the surface there are more concerns that both European and US data have showed a winding down in growth rates. For US manufacturing recently US-based regional MFG surveys have signaled a sharp deceleration for the summer. Later this week we expect to see that US GDP will be sharply revised lower on a surging trade deficit. On that score details were released today on German GDP which confirmed that German growth is both net - export led and investment goods led. German private consumption remains weak; public consumption continues to support some domestic demand there. China is showing signs of slowing as well. Japan is struggling.

Lots of sparks but no fire; not much smoke - To the Stiglitz point we must admit that it is like the central banks and governments in Europe have been striking matches without getting anything else to catch fire. They seem to be reluctant to keep striking matches and Stiglitz is wary of what happens when they stop. In Germany growth is mostly propelled by events overseas. German investment is not following up on any strength in domestic demand from the private sector. So it is not a good idea to treat that as an autonomous source of growth- it too is piggy-backing on export strength. To the extent that German growth leads EMU and German growth is led by demand elsewhere Europe is vulnerable. Taking away support from the domestic economy with domestic demand still not in gear carries risks.

Best analogy - My best analogy for Stiglitz' warning is that of trying to take a patient out of intensive care too soon to get him back to work earning income. Convalescence takes time. To remove a patient from the intensive care ward to normal suite and then from that suite to a rehabilitation facility and then to his normal residence outside of the medical system and finally, back to work, would typically involve a patient passing though several stages of approval by doctors. In the case of the European (and US!) economy there is too much angst over the period of time and money spent getting aid and not enough emphasis on whether the patient is ready to go ahead on his own.

Risks and concerns - Concerns that a dependence on the convalescent aid applied to stabilize things could be a long term set back is usually unfounded in the world of medicine. In medicine they find that painkillers are not addictive when the patient has pain and needs them. Those worrying if there are too many 'pain killers' still being administered in the global economy need only to compare the performance of this patient (the economy) to what he is like when healthy to see the evidence of ongoing disruption. You have to admit that on this comparison there is a lot of hope involved by those who think that ending stimulus and getting back to a normal routine is not running a risk. Just attaining the appearance of normalcy does not by itself make things normal. Some things are not what they seem. Good medicine applied at the wrong time can constitute malpractice even in economics.