German Orders Step Back

German orders fell hard in October after an even stronger surge in Sept. September saw a sharp pullback in both foreign and domestic orders. But the foreign pullback followed a stronger surge in September while the domestic setback followed a drop in September.

While both domestic and foreign orders are up by 1.8% year over year, foreign orders are on a tear despite the month's setback. Foreign orders accelerate from 1.8% over 12-months to 3.5% at an annual rate over six-months to 7.2% at an annual rate over 3-months. In comparison, domestic orders are contracting at a 1.8% annual rate over six-months and contracting at a 2.5% rate over 3-months.

Germany, the strongest economy in Europe, is having its industrial sector stoked by external demand while domestic demand is contracting. This is not the kind of leadership role we would like to see Germany playing in this business cycle.

We would like to see the German economy thriving and pumping up its own domestic demand, so that while Germany's exports were thriving its own domestic demand could be partly satisfied by output from fellow EMU members. But that is not the case here. Germany is being stimulated by its weaker EMU counterparts. Germany's orders tell us that the country is diverting that demand so that it is no longer helping to raise output in those fellow member countries; instead it is stoking output in Germany.

In the fourth-quarter-to-date, German total orders are down at a 1.5% annual rate. This drop is led by an 11.2% annual rate drop in domestic orders (or in German domestic demand). Meanwhile, German foreign orders are up at a 6.4% annual rate. Germany is growing based on foreign demand and that strength is offsetting demand weakness in the German domestic economy.

It is unclear what this drop off in German domestic demand means. Germany always has export-led growth. The strength in German orders from abroad suggests that other economies are doing well. By this time in the expansion we would have expected a bit more life from German domestic demand. But since Germany is not an economy that typically exerts a locomotive effect on the rest of Europe I don't see its `orders weakness' as a harbinger of anything since the weakness is essentially domestic.

Still the Bundesbank has just lifted its outlook for the German economy. Today it raised its estimate for growth this year to 0.5%, up from its June prediction of 0.3%. It also increased its outlook for growth in 2014 to 1.7% from 1.5%.