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Economy in Brief

German Orders Register a Surprise Setback in July
by Robert Brusca  September 6, 2017

Germany's orders fell 0.7% m/m in July after a strong gain in each of the previous two months. The decline in orders was not anticipated because by all accounts German manufacturing has been doing pretty well. The PMI gauge, the ZEW experts, the IFO survey, the EU indexes and so on all have pointed to ongoing solid expansion. The drop in orders in July, however, is real and it is foisted on the German economy by a 1.6% drop in domestic orders. Domestic orders are coming off a very strong 4.8% gain in June which itself is now sandwiched between two declines.

German manufacturing data simply are volatile. If you took each and every report to heart, you would be on heart medication in short order. The small table shows standard deviation calculated over the last five and one half years for some of the main manufacturing series. Real orders are the most volatile (and this is without breaking domestic and foreign orders into separate series). The PMI is next (measuring the change as the simple change points on a monthly basis not off year-over-year growth rates as with the other series). Real sales and IP are close together with volatility bracketing the 2% mark.

The graphic to left below shows German orders tracking manufacturing sales. Clearly, the sales data have the better signal-to-noise ratio, but the orders data do seem to lead changes in direction. Both series are still pointing higher based on year-over-year growth rates. There is still acceleration in train.

The German manufacturing PMI gauge also tracks IP well (both are volume series) and both continue to point higher (see Chart to right). The smoothed manufacturing gauge and the PMI send a clear signal of ongoing expansion.

The monthly data for Germany bounce around a lot. But there are some consistencies in the data between reports and these can be telling. For real orders, all categories slow over six months relative to 12 months then pick up again over three months. For real sector sales, the same phenomenon is observed. However, for real orders, there is a split between domestic and foreign orders as foreign orders then grow faster over three months than they do over 12 months while domestic orders are slower on balance over three months than they are over 12 months. For real sector sales, all categories are growing slower over three months than over 12 months. While German IP is still advancing solidly, the German manufacturing PMI has flattened out in recent months. There is therefore some suggestion of a slowing in progress.

It is always tricky to gauge changes in the speed on an economy. In retrospect, the German PMI gauge shows acceleration in place from early in 2016 although the IP data took a while to catch on. The recent run up in the value of the euro may be a reason to be wary that manufacturing in Germany will slow. So far, the best indicators of manufacturing revival come from the U.S. and Europe, not from Asia; there is little evidence that manufacturing generally is expanding and will lift all boats. I still think that the best manufacturing analysis is local not global.

Moreover, the ECB is getting ready to pull the plug on some of its stimulus programs. And inflation is not yet showing itself in Europe, Japan or in the U.S. Yet, central bankers are determined to go ahead and remove their most accommodative policies. Manufacturing in the U.S. has moved up step-for-step with the rise in Europe; yet, it is not clear what has been the most important motivating factor for this recovery. Although the Federal Reserve may be getting more wary about rate hikes judging for some recent member comments, its balance sheet shrinking program still seems on track.

For now we see all green lights showing for the principal German manufacturing indicators. Looking ahead, we can see some amber lights beginning to glow as the euro rises and offers unknown potential for rising further in the months ahead. Germany also is facing elections that at the moment do not seem to risk any dislocation. But the global environment is still in flux economically since Asia has not fully shifted gears back to solid growth. Also the geopolitical background is unstable with North Korea going seriously rogue with no one willing to stop it. Perhaps the best comment on North Korea comes from (of all people) Vladimir Putin who has noted that sanctions on North Korea will not work, 'they would rather eat grass than give up their nuclear program.' Like him or not Putin seems to have encapsulated the situation in North Kora pretty well. And IF economic sanctions won't bite and if those who could tighten the screws refuse to even try, what hope is there for bringing any pressure on the despot in North Korea? As long as he is saber-rattling, how much does that disturb the prospects for growth in the region and beyond?

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