German IP Rebounds Strongly; Still...More Volatile Than Strong

German IP rebounded to gain 2.5% month-to-month in August after a 1.5% drop in July. With this rebound, German GDP is up at an 8.8% annual rate over three months. However, it is only up at a 0.5% pace two months into the third quarter.

German IP has become more volatile than strong. The growth calculations are being affected not just by outsized gains or drops month-to-month but also affected by a base for the calculation that can itself be unstable and skew broader growth rate calculations. The quarter-to-date calculation is the most reliable since it calculates this month's level averaged with last month's level and properly accounts for the passage of time gauging the gain in IP from the Q2 level, a relatively broad and stable period. On that basis, IP is up by only 0.5% in the third quarter-to-date with consumer goods output up at a 0.8% pace, capital goods output falling at a 1.1% pace, and intermediate goods output falling at a 2.9% annualized rate - not an impressive performance.

Construction output is strong in Q3, rising at a 10.4% annual rate in the Q3-to-date period. German IP in manufacturing is also up strongly at a 14% annualized rate in the quarter to date. Real manufacturing orders are rising at a 6.7% annual rate in the quarter-to-date. On these data, the quarter looks more solid.

Beyond Germany
This month relatively more countries are early reporters of IP results, along with Germany. Spanish and French IP both are up strongly in August, Spain after a substantial drop in July and France after a minor stumble in July. U.K. IP also is higher. Still, in the quarter-to-date, French IP is up at only a 0.5% pace, Spanish IP is falling at a 5.6% pace, and U.K. IP is flat. Also reporting IP in August were the Netherlands, Ireland, Portugal, Sweden, and Norway. IP fell in all of these countries month-to-month. Only Portugal and the Dutch have back-to-back IP declines, however. In the quarter-to-date, IP is falling and falling sharply in all these countries except for Ireland whose IP gain in the quarter-to-data is up at a super-charged 13.4% annualized pace. But the Netherland shows IP dropping at a 2.6% pace, Portugal is contracting at a 5.2% pace, Sweden is shrinking at a fast 7% annual rate and Norway by a 6% pace.

Summing up
The third quarter is not off to a very robust path two months into the data. Of course, we do have the manufacturing ISM in hand for September and we know that the manufacturing reading did pick up. That means some revival for this weakness before IP finalizes in Q3. Still, we have to say right now, so far no good.