German Sector Trends are Clear and Weak

German statistics have been weakening and the weakness in orders reported yesterday was a shock to some. Today the process of being shocked continues with stark and unexpected weakness in German industrial output. Output is off for the second time in two months and by a severe 1.8% m/m. Yr/Yr the drop is -0.6%. MFG IP is off by 2% in the month. Sequential growth rates generally show that the weakness is still cumulating (construction and consumer spending are exceptions of sorts). In the new quarter to date (Q3) output is falling at a 13.3% annual rate, led by weakness in capital goods. While the drop in consumer goods output is the most severe on a Yr/Yr basis, the deceleration is the greatest for capital goods where output seems to stay so high for so long. This it turns out was mirage like Wiley Coyote standing on thin air waving to the Road Runner before gravity took hold. German capital goods output too seemed to defy the gravity and domestic weakness and the overly strong euro. But now that resilience is a thing of the past.

German authorities have tried to argue that the weakness is partly due to the start of the school year. But they hasten to add the trends are going to be lower. There should be fewer denials of encroaching weakness in Germany since the bottom fell out of orders and IP and that has happened just over the past two days.

Things change. And they did not elect either Obama or McCain.

Still the ECB has decided to tighten up its collateral acceptance parameters, and that action will impair liquidity in the Zone and at a time when economic weakness seems to be taking greater hold. In the US two speeches, one by Reserve Bank president Yellen, the other by Reserve Bank president Fisher, talked in less than glowing terms about the US economy. Fisher worries more about inflation prospects while Yellen reports that the next move by the Fed is more likely to be up than down but she reiterated Fed fallibility. Central bankers clearly are not plugged into the news that reveals accelerating weakness. Even the Bush Administration today took the opportunity to say that a new stimulus program was not needed.

While the economic data are worsening central banks seem to be taking the opportunity to let weaker growth drag inflation lower, rather than to move to offset the weakness. This is done by ignoring the weakening (Trichet), denying it (Germany, at least so far) or by making inflation the greater threat (Richard Fisher, and others).