German Orders Growth Extended

Order Trends: German new orders growth was extended as foreign orders snapped back after a one-month decline. Domestic orders fell by 1.9% after surging by 9.5% in July. Orders have been rising steadily, strongly, over the past six months with domestic orders up in five of those six months and foreign orders up in four of those six months. Both series are showing continuing acceleration not just growth. In the current quarter domestic orders are outpacing on the back of a one month 9.5% spurt in orders in July as the new quarter began.

Foreign order sources: Orders from countries outside the euro zone alone jumped 5.9%, in August while foreign demand for German manufactured goods from the other 15 countries sharing the euro rose by just 2.8% in August from the month earlier. Growth outside of the e-Zone drove German orders this past month.

Euro-Area policy cuts no slack - Apart from orders, the European Commission Wednesday warned nine countries, including Germany, that their budget deficits are too large. This is the legacy effect of having used domestic deficit spending to bolster the economy in the recession. That policy response was good thing, but it now puts those countries afoul of EU Commission rules.

Out of touch with reality? The warning comes at an odd time since Euro-central bankers and policy officials in the US have underscored that the time is not right to withdraw stimulus. Hanging the ‘Sword of Damocles’ over the heads of the various ECB nations does not seem like the right policy tilt to encourage them to keep their stimulus efforts in place. It sounds a lot like pressure to get you house in order NOW! The EU Commission is using bad judgment and being too strict on rules of evaluations at a time like this. Yes it is just this sort of thinking that keeps the euro strong but it also unduly complicates and hampers policy. This stance reminds me of the ECB’s problems in cutting rates in timely fashion in the recession. The target rate ceiling on the HICP hampered the ECB in the pits of the crisis. It cut rates as a part of an ‘international effort’, using that as an excuse to cut rates with headline inflation well over its ceiling at the time. I suppose we are to understand that this warning from the EU Commission as a formality that has come as scheduled. But in times such as these what is the merit? Does this act brand the EU Commission tough or as out of touch?

Liquidity has long been viewed as having the potential for fueling inflationary problems for an economy. Before that problem actually emerges, several "market-based" indicators help provide a market view of the pricing outlook. While hardly precise, the figures do give a measure of risk. Some view that risk as an outgrowth of how much liquidity there is in the economy, and by all measures, inflationary pressures are set to rise.

So far, the inflationary environment has been tame. Through August, lower oil prices dropped the y/y change in the CPI to -1.4% although recent gains in prices have raised the three-month rate to 4.9%. During that period "core" prices power fell to 1.5% on both a twelve and three-month basis, down from a high of 2.9% during the summer of 2006.

Let's look at five market-based harbingers of future inflation.

First, the dollar is an indicator of a potential inflationary threat in that it raises the prices of imported goods relative to domestically made products. The dollar has been under significant pressure recently as the weak U.S. economy has forced the Federal Reserve to lower interest rates to near-zero from above 5% in 2007. Certainly, recessions abroad have forced rates lower there as well. The declines, however, have been not as large as in the U.S.

Next, gold & commodity prices give signals of potential inflationary threats. They do not feed directly significantly into product prices, but rather they can be a measure of the market's inflationary psychology. To that end, gold recently has jumped to a record $1,040 per ounce, up 14% y/y. Copper prices also have been strong. They have doubled since December while aluminum prices have risen by one-half.

The interest rate yield curve gives yet another reading of inflationary psychology in the credit market. Following inversion as recently as late-2007 the spread has widened to over 300 basis points, though it recently has narrowed slightly. Also providing an indication of inflationary risk is the market for TIPS, or Treasury inflation-protected securities. Recently, that signal has stabilized after a sharp upturn this spring. From the U.S. Federal Reserve, two papers discuss the value of TIPS. One, The TIPS Yield Curve and Inflation Compensation

There's been no let-up in the deleveraging of consumer balance sheets. For the seventh consecutive month, the Federal Reserve reported that consumer credit outstanding has fallen. During August, it was down by $12.0, or 4.0% y/y, and the sharper July decline was revised only slightly shallower. The latest was the eleventh since last summer. The magnitude of the cutbacks continues to impress as the y/y change amounted to a record 4.4% drop. Double-digit monthly declines have prevailed all this year. The latest decline was roughly double expectations.

Usage of non-revolving credit (autos & other consumer durables), which accounts for nearly two-thirds of the total, fell $2.1B after the record $16.6B July drop. The 2.4% y/y decline is near the record. Additionally weighing on overall credit has been the tight rein on revolving credit usage. During August, revolving credit outstanding fell a near-record $9.9B for the eleventh consecutive monthly drop. Year-to-year the 7.8% decline is by far the record as consumers left their credit cards in their wallets.· With these declines, consumers have been successful in reducing credit outstanding as a percentage of disposable income to 22.6% from its 2005 high of 24.4%. This compares to the low near 16% in the early-1990s. Now that the "shop-till-you-drop" mantra has been diffused by the aging population of the U.S., a return to a permanently lower level of credit usage is likely.

Finance companies (-11.5% y/y) and savings institutions (-18.5% y/y) have seen the largest pullbacks in credit extension while commercial banks (+0.1% y/y) and credit unions continue to see positive, though diminished growth. The Federal government and Sallie Mae continued to lend during August by 20.6% y/y which was the strongest growth rate since early 1991.

These figures are the major input to the Fed's quarterly Flow of Funds accounts for the household sector.

Credit data are available in Haver's USECON database.  The Flow of Funds data are in Haver's FFUNDS database.

Predicting Crises, Part II: Did Anything Matter (to Everybody)? from the Federal Reserve Bank of San Francisco can be found here.