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Economy in Brief

German Real Orders Continue to Slither Slower As Retail Sales Perk Up
by Robert Brusca  January 7, 2019

Germany's real orders and real sales by sector are either falling or decelerating or both on a broad front in November. Of nine growth rates for total orders, foreign orders, and domestic orders over three months, six months and 12 months, only one has a positive value: Domestic orders over three months.

Real sector sales cover 21 observations (three horizons for seven sector-definitions). All have negative values and all but one (consumer durables over three months) demonstrate deceleration from the previous period in terms of annualized growth rates.

The monthly results show similar broad-based declines, but interestingly the quarter-to-date calculation which takes the average of the last two months over the previous quarterly average (since we are two months into Q4) show gains in real orders and in real foreign orders with a drop only in real domestic orders. Sector sales show declines in all categories, however.

In short, the orders data are not very encouraging. The chart shows that year-over-year real growth rates consistently yield an unrelenting downward path.

Still, all hope is not lost. Despite the weakness in German orders, retail sales are holding quite firm and not just for Germany.

EMU-wide retail sales as well as German sales are showing some life and actual strength in November. However while euro area wide retail sales are accelerating, food, beverages & tobacco sales are gradually imploding and textile sales are weakening over three months.

Still, the message from retail sales is largely a very positive one. Sales are growing over three months for all the EMU and EU reporting countries in the table. Over six months, only sales in Norway are falling. Over 12 months, sales are increasing everywhere. Similarly, quarter-to-date sales are rising broadly two months into Q4. The sales picture is solid if not strong.

The message from retail sales (except for motor vehicle registrations) is quite positive. And sales results suggest that industrial output and orders should be underpinned, at least for consumer goods.

But Germany, of course, serves global markets. And China is clearly in a slowing mode. German firms export capital goods and industrial products as well as consumer goods. While consumer goods industries in the EMU/EU look firm, the broader industrial situation is going to be relatively more affected by the growth outlook and that has been fading.

On balance, we get a mixed picture from German orders and EU/EMU/German retail sales trends. And despite somewhat upbeat retail sales trends, note that for all of EMU sales volumes are up by just 0.9% over 12 months. That is thin gruel for ‘good news.' Motor vehicle registrations are down by 9% over 12 months- that's not good news at all. But then again the quarter-to-date growth rates on most scores are much better.

From this, it is hard to be very sure which way trends are pointing or which ones will be dominant. We have seen this exact same -not just prevarication- but opposition in trends in the U.S. as well. The December U.S. jobs report logged a sharp gain of 312K while the ISM manufacturing index made a huge one-month drop that had chilled markets prior to release of the jobs report. Markets are being confused by cross currents and by strong opposing cross current- in a number of places. What should we do in response?

Transition periods are often periods in which these sorts of cross currents occur. So we can be relatively safe in calling this a symptom of a transitional period. The next question is what kind of transition is it? Clearly, it is a transition from a higher growth rate to a lower growth rate, but the follow up question is this: how low? The data do not speak to that. But the Fed in the U.S. by choosing to go slower and to be more circumspect gives us a hint on the degree of its concerns. The flattening U.S. yield curve is more of warning that even more slowing could lie ahead. The future appears to be in flux and we cannot be sure yet if it is baked in the cake or not. As of yet, the yield curve does not think so; it has not flashed its ultimate warning light, a true inversion.

Theresa May has set as the date for the vote on Brexit on January 15. The U.S. and China currently are meeting in a new round of what China calls trade talks conducted in good faith. There are several events on the near horizon that could bolster or jolt markets. So far, we can be encouraged that economies have done as well as they have with the threats of things like Brexit and trade wars hanging over their heads. The U.S. even underwent a period in which its NAFTA deal was renegotiated, but that deal is still pending approval. Even with some tough shoals to be negotiated ahead, we cannot be sure of what we will see next. Growth has been consistent and stubborn even if it has been slow in this now extended economic recovery period. Will it continue? For now ‘yes' is the best answer, but clearly concerns have been mounting and some continue to mount.

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