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Economy in Brief

IFO Tips Back from the Heights
by Robert Brusca  August 25, 2017

Still an exceptionally strong report
The IFO continues to show exceptionally strong readings. This month's Markit diffusion report also produced news of more strength in the industrial sector although the German services sector continues to show some very laggard behavior in the Markit framework. In the IFO framework, all is well or even better. All is strong. The IFO all-sector index stands this high or higher since 1991 only 0.6% of the time. Two of the four sectors are on peak readings for that period: manufacturing and construction. Wholesaling is higher only about 1.3% of the time. Retailing qualifies as the 'weak sector' with a queue ranking in its 83rd percentile that is higher only 17% of the time and stands some 27% below its all-time strong reading.

The overall metrics are very strong
The overall business situation reading scores a 99.4 percentile standing. It is rarely stronger. Expectations register a 96.2 percentile queue standing.

The month-to-month stuff
Month-to-month the all-sector index 'pulled back' to 24.4 in August from 24.6 in July. It's really not much of a consolidation move. Manufacturing and construction continued to reach higher levels with each of them establishing new high readings since 1991. Wholesaling backtracked to 23.6 from 24.2. But the big step back on the month is the retail sector which fell back to a reading of 5.1 in August from 11 in July. That retail back-step was huge; it has only made larger month-to-month drops 13% of the time historically. And it is quite odd for retailing to sour in a month when the rest of the economy is doing so well in both absolute terms and in terms of momentum. So while the whole of the report is quite impressive, the setback to retailing is real and sharp and also quite hard to explain. And it's the second large step back in a row for retailing. The two month drop in retailing has been exceeded only 16 times (0.5% of the time) since 1991. Retailing in Germany is having issues. Apparently car dealers are the segment most concerned about the outlook. Germany has been wrestling with several auto sector scandals one concentrating on mileage standard cheating in general and a second focusing on the efficacy of continuing to use diesel engines at all.

The overall assessment
The business situation actually slipped this month with its index falling back to 36.9 in August from 38.7 in July. Expectations, however, gained in August, rising to 12.6 from 11.4. It is quite extraordinary for the IFO reading to be so strong and to have expectations continue to ramp up. But that is the situation. The German economy is really doing well and expectations are for it to do even better.

With the economy doing so well in Germany, there is interest in what ECB President Mario Draghi will say in remarks at the Federal Reserve symposium on world growth being conducted in Jackson Hole, Wyoming. In remarks made just ahead of the Fed meeting, Mr. Draghi played out this well-worn theme of patience as he deemed the use of unconventional operating measures as largely successful. His take on these measures, however, is guarded. Draghi believes they are not fully understood and so making policy changes with theses sorts of program in force should be done carefully. This is a significant point as the ECB is widely expected to be ready to pull back some of its special stimulus programs soon and the Federal Reserve is preparing to shrink its enlarged balance sheet, having said it is ready to do it but not yet having announced a date for it. Markets are waiting for any sort of news on these topics out of - of all places - Wyoming, the 'Wild West,' Yippie yi yo kayah! (for those who need it, translation/context here).

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