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Economy in Brief

German Orders Crash and Burn in January
by Robert Brusca  March 7, 2017

German orders plunged by 7.4% in January despite a series of very upbeat economic reports recently especially those featuring the use of diffusion indexes. As I have pointed out before, I do like diffusion indicators as they are sensitive trip-wires for changes in growth rates, but that feature cuts both ways. Diffusion is actually a measure of breadth not of strength and diffusion and strength readings have not been in step as much recently.

On February 21 in my article "European PMI Data Rise and Create a Twist on a Theme," I wrote as follows about the PMI data:

"Lots of recent highs
For France, the services sector is at its highest reading since January 2012. For Germany, manufacturing is at its strongest since January 2012. The German overall private sector reading is also at its high on that timeline, the same as for the two EMU private sector gauges as well as the overall EMU reading. That's a lot of strength from this indicator. Of course, only Germany has an unemployment rate low (since the EMU was formed; since German reunification) and many EMU nations are still above their median rates of unemployment since the EMU was formed (a broader timeline than 'since 2012'). So let's give credence to the better data, but let's also keep it in perspective."

Obviously, PMI data have been bubbling even as the broader reports based on adding up dollars or euros, or 'real' variables, or employment head counts have fallen short of such ebullience. Today's report on German orders (real euros) may prove to be a one-month affair or maybe not. But it is a reminder that the PMI data and the old style 'accounting data' are telling us different things. The sales data on the month for Germany have been steadier, not flying as the PMI statistics and not as volatile as the orders series. German sales show a steady acceleration in sales from 1.1% to 3.1% to 6.3% (all at annual rates) on shortening horizons from 12-month to six-month to three-month. That sort of acceleration is reassuring in the face of the one-month German order collapse.

Orders by region
The details on orders show domestic orders posted a double-digit fall of 10.5% in January as foreign orders decreased 4.9%. New orders from within the euro area declined 7.8% and those from other countries dropped by 2.9%. January's sharp weakness is German-centric and euro-centric, with only a dash of globalism.

The German economics ministry was not taken aback by this drop instead taking the high road by declaring in a statement: "The weak start to the year should be manageable. Business confidence in manufacturing is significantly brighter than the long-term average, so that a pick-up in manufacturing can still be expected."

Orders by sector
By sector, orders for capital goods decreased sharply by 9.9%. Demand for intermediate goods and consumer goods slid by 4% and 2%, respectively. On a year-over-year basis, industrial orders dropped slightly by 0.9% i January after expanding 8% in December. That's a big difference.

The OECD is still upbeat but has not shifted to overdrive or even second gear...
In its Interim Economic Outlook report, the OECD projected global growth of 3.3% for this year and 3.6% for next year; the global growth rate is seen recovering from 3% in 2016. The outlook was unchanged from projections made in an OECD report in November. The growth projection for the U.S. for this year was raised to 2.4%, while the forecast for next year was clipped to 2.8%. Euro area's growth forecast for this year was maintained at 1.6%, but the outlook for next year was cut to 1.6% leaving Europe with a flat growth profile.

I suppose the lesson here is not to count your chickens before they are hatched. Any outlook is only an outlook. And while markets and officials need to plan ahead, the best laid plans can and do go awry especially in economics. The Fed in the U.S. has been on a path to rate hikes several times in this cycle and has been pulled away from the brink by unexpected economic or market events. No policy move is a move until it is made regardless of how firmly expectations are held. While the global economy seems to have upped its game recently, there are still many risks (as the OECD also points out in its statement today that accompanied its projections). Growth is still highly uncertain. Policy may seem to be on auto pilot, but it still is data dependent. And even with oil prices sprouting like shooting stars, inflation is not spreading in the various core measures, a signal that the kindling is still wet. We continue to get counter-signs that remind us that policy remains on uneven ground in Europe, in the U.S. and in fact globally. Take nothing for granted.

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