Economy in Brief

Manufacturing production trends in the European Monetary Union (EMU) showed slippage in October, with the mean change in production among thirteen of the longest standing members posting a drop of 0.1% following a drop of 0.7% in September and a drop of 0.2% in August.

Monthly trends Among these 13 members, seven of them posted declines in October including a decline in Germany, the largest economy in the EMU and in Italy, the third largest economy in the monetary union. September had produced declines in eight of the thirteen reporting members; that compares to seven that showed declines in August. On a monthly basis, slightly over half of the reporting countries have been showing declines on a regular basis over the last three months. The largest economy in the monetary union, Germany, has showed declines in two of those months. France, the second largest economy, has showed a decline in only one of those months. Italy, the third largest economy, has showed declines in two of those months. Spain, the fourth largest economy, has logged a decline in only one of those months.

Sequential trends Sequential growth rates from 12-months to six-months to three-months do not show a clear pattern, but there is an improvement over three months where the median growth rate for these 13 countries is 0.4% at an annual rate. That compares to a decline of 3.1% at an annual rate over six months and a decline of 1.4% at an annual rate over 12 months. Over three months six of the thirteen countries showed declines in industrial production. Over six months, nine of the thirteen countries showed declines. Over 12 months, declines are logged in eight of the thirteen countries. The breadth of the declines in industrial production and the monetary union has therefore not been spreading but it is still significant. Among the largest countries in the monetary union, Spain, the fourth largest economy, does not show any declines in industrial production over 12 months, six months, or three months. Italy, the third largest economy, shows declines over all of those horizons. France shows declines over 12 months and six months; Germany also shows declines over 12 months and six months.

Momentum: accelerations/deceleration Looked at over 12 months, 50% of the reporting monetary union countries show output accelerating compared to their growth over the 12 months earlier. Over six months 50% are accelerating compared to their 12-month annual growth rates. Over three months the percentage accelerating compared to six-months is slightly lower, at 45.5%. These statistics underpin the sense in which output growth acceleration or deceleration continues to be more mixed than it is dominated by a trend. The propensity for output to either accelerate or decelerate is hovering around the neutral value of 50% over twelve months, six months, and three months. That assessment is in the aggregate. There clearly are members that are showing more weakness and even progressive weakness although there are no members showing progressive acceleration. Greece shows progressive weakness with six-month growth weaker than 12-month growth. Three-month growth weaker than six-month growth and six months weaker than twelve months for the Netherlands, as well as for Belgium and Austria. There are no clear accelerating tendencies. Italy shows a drop in output over 12 months at a 3.7% annual rate then improves to a 1.7% annual rate drop over six months and over three months, making Italy the closest thing there is to showing an accelerating pattern among countries and the monetary union. Still, there are countries that are showing more strength even if it isn't consistent formally acceleration such as Malta that logs a 28.2% annual rate in output over three months and Portugal that has a 25.4% annual rate gain in output over three months. Spain shows output increasing on all horizons and has only a slight step down over six months compared to 12 months; it logs an increase at 14.8% at an annual rate over three months so even though it's not strictly persistent acceleration there's still evidence of some strengthening.

Japan's economy watcher index improved in November. The future index also improved in November; however, both the current and the future indexes continued to produce readings below 50 indicating that contraction remains the order of the day.

Economy watchers indexes remain weak These indexes have been skimming below the level of 50 for some time (3-month, current; 9-month, future). Weaker, yes, however, not by much. There is mild contraction indicated in both the current state of the economy and the expected future state of the economy. However, this is not an entirely unusual situation because the ranking of the current index is a 64-percentile standing which indicates the diffusion index is above its median which also sends home the message that a below-50 reading has some sense of normalcy to it for Japan (evaluated on data since 2003). The same is true for the future index, at 49.4, is below 50 and has a queue percentile standing at its 56.5 percentile, above its median for this same period.

Current Index The current index has month-to-month index changes that are mid-range for a diffusion score of 50%. But October and September have diffusion scores below 50, showing more indexes are weakening month-to-month than are strengthening. Sequentially, the readings are compared on a period-average-to-period-average basis. The 12-months average improves in 90% of the components compared to the average of 12-months ago. Comparing the 6-month average to the average over 12 months shows that no sector improved. Comparing the 3-month average to the six-month average across line items, 60 percent of the sectors improved.

Future Index The future index improved broadly month-to-month in November with a diffusion reading in November at 80%, up from only 10% in October and 30% in September. The diffusion reading on the future index over 12 months, 6 months, and 3 months, are similar to the pattern of the current indexes. There is strong breadth over 12 months, no improvement over 6 months compared to 12-months, and a reading showing 60% improvement over 3 months compared to 6 months. Note that these metrics are different from the period-to-period change in the table that is constructed from point-to-point data (not averages). But the signals really are quite similar (except for the 12-month point-to-point results, that show broad weakness in contrast the broad strength signal by comparing averages).

German IP fell by 1% in October, led by declines of 1% in consumer goods output, a 0.4% decline in capital goods output, and a 0.4% gain in intermediate goods. Output had fallen and fallen sharply across the board in September. That fall was one of the main reasons that expectations this month were slated for a bounce-back.

Despite this, the pace of decline has slowed over three months. German IP falls by 4.7% over 12 months; it drops at an annual rate of 9.1% over six months and then drops at a three-month annualized rate of 1.8%. Consumer goods output comes closer to having an ongoing accelerating decline in progress. Capital goods output declines at a 4.9% pace over 12 months and declines at an 8.1% annual rate over six months then shifts to log a strong 9.8% increase at an annual rate over three months. In contrast, intermediate goods output shows declines on all horizons without and clear trend beyond that.

Surveys for German industrial performance generally get weaker from 12-month to 6-month to 3-month, except for IFO manufacturing expectations that fluctuate and side-slip. France, Spain, Portugal, and Norway report early IP data for October. Sequentially, only Spain has a pattern and that is accelerating. The rest show fluctuation but three of the European countries (exception, Norway) show IP rising over three months.

Still, the queue standings for the various metrics in the table are uniformly low. Among the 18-rankings in the table, only three of them stand above their 50-percentile which puts them above their respective historic median year-over-year gains. Spain and Portugal show historical strong manufacturing IP gains while for Germany real orders have a standing above their historic median.

On balance, it is another disappointing economic report for Germany. The manufacturing sector remains under pressure although there is some evidence of slightly better growth in other European economies. For the most part, the quarter-to-date readings show ongoing weakness.