Economy in Brief

Strong gains in IP - Industrial production in the European Monetary Union rose by 2.6% in March with manufacturing output up by 2.5% I'll put a manufacturing rose across all of the main manufacturing sectors led by a 3.2% month to month gain in capital goods output with intermediate goods output at 0.6%, the weakest sector increase.

**Accelerating trends **- Output on the monetary union is also accelerating but the headline series up at a 20% annual rate over three months stepped up from a 9.6% annual rate increase over six months and from a 3.9% increase over 12 months the acceleration and manufacturing it's quite similar to the crowd profile on the headline series capital goods output accelerates from 12 months to six months to three months as doesn't media code output consumer goods output rises by 13.5% / 12 months still matches the double digit gain over six months at 11.1% but then also grows in only 8.2% in an annual rate over three months we'll lose our strong and solid growth rates they reflect a deceleration

Survey vs accounting data - very different stories: There's another interesting nugget in this report… I summarize, using text descriptions, the behavior of the PMI gauges for EMU. Comparing the recent three-months of data as well as readings over the three sequential periods, what we see is that, while output in the monetary union is rising and rising strongly and accelerating over this time profile in IP data, the S&P PMIs for manufacturing in the monetary union are below 50 in each of the sequential time periods as well as each of the recent months – that is quite a disconnect. We look at these PMI gauges largely because they are the earliest data that we have on economic statistics. But here we have an example of how the accounting data that reflect output numbers that are counted up by national statistics bureaus compare to privately generated survey data that are inferential. We find that the two series give us very different results. The PMI data are useful and can often be early warning signs of things changing direction, however, for the Euro-Area it's clear that the PMI data have been unduly pessimistic over the last year. Meanwhile, in the US, the point is being made that the survey style data < sometimes called ‘soft data’> have been much weaker. Perhaps this is a warning that you should be aware you're placing too much emphasis on those data.

Quarter-to-Date: Output to date in the current quarter is also strong but the headline series is up at a 9% annual rate. Manufacturing is up at an 8.3% annual rate and the only consumer durable goods are showing a decline in output in the quarter. Rankings of year-over-year growth rates on data back to mid-2007 show the current year-over-year growth rate rankings above their respective 50th percentiles, which means they're above their historic medians for this period. This is true for all the EMU-wide characteristics except capital goods.

Some output declines linger, but they do not dominate - Country level data for 13 monetary union members focus on the manufacturing sectors and show 5 manufacturing sectors with output declining in March, in February, and in January, out of 13 reporting countries that is not extreme but is significant. Looking at the 3-month, 6-month, and 12-month periods, output contracts on those horizons and only for three to four of the reporting countries. Among the four largest monetary union members only Italy shows output declines sequentially and those declines are for 12-months and 6-months as Italy posts a strong, 7.2% annual rate increase, over 3-months.

Only three monetary union countries show quarter-to-date declines; these data are now complete data for the quarter. Countries with declining output QTD are Spain, Malta, and Greece.

However, all is not completely well in the monetary union… when we rank IP growth rates on data back to June 2007, the three largest monetary union economies show growth rates that rank below their historic medians. Only Spain, among the largest economies, has a growth rate that ranks above its historic median and that's by a narrow margin with a ranking of 51.4%.

On balance it's a good manufacturing report for Europe in March. This report shows manufacturing sector to be in solid shape despite all of the concerns and drum beat of weak readings form the PMIs. These data, of course, draw from the period before tariffs were mooted, implemented, and then reduced, so there still may be a bumpy road ahead for industrial output. But we can see that, as of March, conditions are fairly strong for output in Europe, which will continue to be underpinned by the fact that Europe will be spending more to provide for its own defenses from here on out. The tariff impact, whatever it is or isn’t, lies ahead.

Measured on the HICP headline scale, German inflation has reached the promised land. Sequentially Germany’s HICP measure is up 1.9% over 12-months up at a 1.9% annual rate over six-months and much weaker at a -0.6% annual rate over three-months. A year ago, the pace of the HICP was 2.6% so this slide of German inflation into its overall target zone for European Monetary Union-wide inflation rate has been slow and relatively consistent.

The German domestic inflation measure isn't quite as well behaved and shows more signs of simply being stable skimming just above that hallowed 2% mark. A year ago, German domestic inflation ran at a 2.2% annual rate, currently, year-over-year it's at 2.1%, the six-month pace is at 2.3%, the same as the three-month pace, which is 2.3%. None of these are deal-breakers for monetary policy since German inflation has been within a couple of ticks of the desired path even on this domestic scale now for over a year, tracking the target that the ECB seeks for the monetary union as a whole.

However, a good deal of inflation progress continues to reside in the behavior of oil prices Brent oil prices are down for three-months in a row and they've certainly helped to contribute to good performance on the overall and domestic inflation measures. Germany's domestic CPI excluding energy was up 2.6% a year ago, currently it's up by 2.8% over 12-months it's up at a 2.6% annual rate over six-months, and at a 2.7% annual rate over three-months. Once energy is excluded, Germany's domestic inflation measure is steady, much like its headline measure, however it's skimming somewhere between half a percent and eight-tenths of a percentage point above the 2% target that the ECB sets for the European Monetary Union as a whole.

The point of saying it that way, talking about German inflation compared to the target for the monetary union as a whole, is to remind everyone that there is no target for inflation in Germany there's only a target for the monetary union as a complete entity. But Germany is the largest economy in the monetary union; what Germany does goes a long way toward putting the overall European measure in its proper place. Currently Brent inflation is down 27.7% over 12 months, it's falling at a 25.4% annual rate over six-months, and dropping at a 60.3% annual rate over three-months. These sharp declines in energy prices certainly go a long way toward making the headline inflation pace for Germany as well as for EMU behave.

The HICP measure doesn't give us up-to-date energy readings yet so we cannot calculate comparable statistics for the monetary union as a whole. However, the German data are quite suggestive that if we were to do that, we would find a similar outcome, that the HICP headline appears to be well behaved but that the core would probably appear to be a little more stubborn. Regardless of that fact, the question is where the ECB would come down with its discretion. And recently central banks have been quite tolerant about inflation-overshooting. However, that worm may have turned.

A new future…unfolds or unravels Economies now face different challenges. Europe is going to be in charge of more of its own military defense and that's going to require more spending; that will create more stimulus and possibly generate more inflation pressures. In addition, there is this tariff imbroglio that could resolve either with a closer-to-free-trade result with tariffs being reduced, or a worse-result with more tariffs being imposed. A world with more tariffs or higher tariffs would be a world that was likely to be flirting with inflation a little bit more, at least over the next year or so. The ECB might still continue to be tolerant of that. However, a lot about these economic circumstances remains unknown. There's a lot of uncertainty about the performance of the US economy that can help to set the stage for how the global economy is going to perform. So, the future still offers the potential for more economic drag from a high tariff world or lower inflation performance from a lower tariff world and it's still hard to judge which of these worlds we're going to be in over the next 12- to 24-months. And now, German headline inflation is behaving quite well although the core reminds us that Germany may be farther away from its goal than the headline makes it appear, like that famous rearview mirror image in the movie Jurassic Park. Looking at things through mirrors can distort them. And at this point I don't think policymakers know exactly how to look at the future whether they know the rearview mirror from the windshield or the future from the present. There's a great deal of uncertainty, a great deal of disagreement and very little trust. Stirred together, it's not a good combination for policymakers. Double, double toil and...trouble? We shall see.