German industrial output rose a firm-looking 1.9% in May, but since that followed a 2.1% drop in April the results were not as expected and were disappointing. These two months follow a mild 0.2% rise in May. As a result in Q2 German IP is falling at a 4.5% annual rate two months into the new quarter. Who would expect with that with such strong orders growth, German IP could be poised to SUBTRACT from GDP in Q2? Well yes, some of the problem is construction and that is an old theme; but the weakness in IP has a broader base. Construction is off at a sharp 30% annual rate in the quarter. Capital goods and intermediate goods output each are off at about a 4% pace and only consumer goods output at +5.2% is up in the new quarter – so far.

The chart plots IP growth vs orders as a ratio to IP. The ratio of Orders to IP does signal shifts in the growth rate of IP itself. That ratio has been on a long trend since early 2002. After a lull, it is back up strongly since February. However output, which is intrinsically volatile, has backed off in recent months as its growth has slowed. The order/IP ratio says that the pull back is temporary.

Meanwhile the facts show that IP growth rates have slowed sequentially, not just in the second quarter. That is true for the headline figure for capital goods output and for intermediate goods and for construction. Only consumer goods output is accelerating. Given orders strength we wonder if bottle necks are setting in. Does the ECB traditional inflation pressures have to worry about in Germany? Or is the IP pull back with growth still at 4.6% Yr/Yr simply normal fluctuation in a still strong and rising trend? Orders vs. output trends in Germany will bear watching to illuminate this issue.