German IP Perks Up on Capital Goods

Domestic-Sourced Growth Remain Elusive

German IP picks up after drop - The pick-up in German IP is good news. Unfortunately it is still IP rising on the back of capital goods output. The capital goods sector is the backbone of the German export machine. Capital goods output surged by 4.6% in October after being flat in September. Consumer goods shipments rose by 0.8% in October after dropping by 0.2% in September. Intermediate goods output recovered from a Sept drop of 1.8% to rise by 2.9% in October.

German business as usual - With the surge in capital goods output we have a pretty good idea that this is business as usual. That means the rise in domestic IP is not evidence that the recovery is spreading to the domestic economy in any direct way. It is true that any ramp up in domestic output for any reason boosts the German economy and since it puts German workers to work and uses Germany factories there is some multiplier effect from it. But there is no evidence of a direct pick up in output to service increased domestic demand.

No shifting of gears evident here - Over three-months consumer output is up at a 5.2% pace compared to 5.4% Yr/Yr. There is little evidence of a boost there. But capital goods output is up at a 32% pace over three-months compared to 18% Yr/Yr. Intermediate goods output is up at an 11% pace over three-months compared to 13% Yr/Yr.

Divergent trends - German unemployment is at an 18 year low. There are good reasons to look for the German domestic economy to begin to flourish. At the same time Germany reported a drop in exports in October. The weakness in the Zone is beginning to take some toll. Because of these divergent trends I am knit-picking about which demand is up and where demand is coming from.

New source of growth or not? Weakness in German exports could pull growth down. But resurgent domestic growth could provide a counter balance. Even with some weakness in the Zone we have documented that German manufacturers have a built-in pricing edge from years of running a lower-than-EMU-average inflation rate. Still, without demand even the most competitive firm will have to scale back. The question is if domestic demand will well up and if it will be strong enough to provide a counter punch to the weakness that austerity is bringing to the rest of the zone. So far the answer to that question remains elusive. We see the evidence of weaker German exports but IP is still strong. We see lower unemployment but demand has not really impacted output. We will continue to watch these trends.

Total German IP
Saar exept m/m	Oct-10	Sep-10	Aug-10	3-Mo	6-Mo	12-Mo	Qtr-to-Date
IP Total	2.9%	-1.0%	1.5%	14.1%	12.6%	11.7%	7.2%
Consumer	0.8%	-0.2%	0.7%	5.2%	7.8%	5.4%	4.3%
Capital	4.6%	0.0%	2.3%	31.2%	23.0%	17.8%	18.7%
Intermediate	2.9%	-1.8%	1.7%	11.1%	11.3%	13.3%	3.9%
Memo
Construction	1.3%	-0.2%	-0.2%	3.9%	-1.2%	6.8%	3.5%
MFG IP	3.1%	-0.8%	1.9%	17.9%	15.3%	13.5%	9.7%
MFG Orders	1.6%	-4.0%	0.0	4.2%	6.0%	18.1%	-6.9%