Economy in Brief: May 2023

Japan’s industrial output was flat in April after rising by 0.2% in March and by 4.5% in February. Manufacturing output fell by 0.2% in April after rising 0.8% in March and gaining 4.9% in February. Despite the flat or declining output in April for industry overall and manufacturing, Japan carries momentum from strong gains in February and further gains in March after stumbling in a deep hole in January. As a result of this output pattern, these weak-seeming monthly numbers are setting output up for a strong gain in the second quarter relative to what was a disappointing first quarter in Japan. Overall output is growing at an annual rate of 10% in the second quarter as manufacturing output is growing at a 12.1% annual rate. These early returns for the second quarter occur with only one month's worth of data in hand.

Sequential growth rates show total industry output growing 0.2% over 12 months, advancing at a 0.6% annual rate over six months and exploding at a 20.2% annual rate over three months. Manufacturing output is up by 0.6% over 12 months, growing at a slightly faster 0.8% pace over six months and then bursting out at a 23.9% annual rate over three months.

IP manufacturing sectors Sector growth rates show acceleration in progress for consumer goods. Their 7.4% growth over 12 months is substantially preserved over six months and then mushrooms to a 24.1% annual rate over three months. Intermediate goods output falls by 3.3% over 12 months, improves to a decline at just a 0.9% pace over six months and then surges higher to a 25.8% annual rate over three months. Investment goods have a more complicated pattern, with output rising by 1.6% over 12 months, then giving ground to fall at an 11.4% annual rate over six months but recovering to surge at a 26% annual rate over three months.

On monthly data, the manufacturing sectors show three output gains in a row for consumer goods, and gains in April and February with a decline in March for intermediate goods, while investment goods display three monthly increases over February, March, and April. On balance, the second quarter looks like it's on its way to delivering strong growth in Japan. The quarter-to-date growth rates for consumer goods, intermediate goods, and investment goods lie in a range of 15% to 20% at an annual rate. These are quite strong growth rates for output.

Other industry Mining is a different story, showing output declines in February, March and April although the output declines diminish in April. Mining shows an 8.9% output drop over 12 months that worsens to a 17.6% annual rate decline over six months and worsens further to a 22.4% annual rate decline over three months. The mining sector in the Japanese economy is weak by months as well as sequentially weak and is still weakening over the past year.

Utilities for electricity & gas show declines in February and March month-to-month but bounce back as output increases by 1.4% in April. Sequentially utilities are showing a weakening trend with a 5.7% decline over 12 months, a 6.9% annual rate decline over six months and a 19.8% annual rate decline over three months. It's a bit of a surprise that electricity & gas usage can sequentially decline while manufacturing, for the most part, is accelerating.

Both mining and electricity & gas show output declines in progress in the second quarter with mining showing a 21.4% annual rate decline early in the quarter and electricity & gas showing a 14.3% annual rate decline early in the quarter.

Despite what looks to be good momentum over the last 12 months, Japanese output has not generally been impressive. Total industry output is still 2.5% lower than it was in January 2020 before COVID struck most of the global economy. Manufacturing output is lower by 3.4%, consumer goods output is lower by 2.5%, intermediate goods output is lower by 5.6%. Only investment goods show output stronger in April 2023 than it was in January 2020 with a gain of 2.4% over that three-year period. Mining and utilities both show weak output with mining weaker by 16% than it was in January 2020; utilities output is weaker by just 1.9%.

The growth in nominal money supply is declining globally in the major money center areas. Japan shows the most resistance to deceleration while the U.S. is the strongest example of monetary deceleration.

United States: U.S. money supply growth has not only decelerated but it's contracting in nominal terms as it is declining at an accelerating rate. U.S. money supply falls by 4.6% over 12 months, its annualized growth rate is -7% over six months, the annualized growth rate over three months is -9.8%.

EMU: The European Monetary Union (EMU) also shows declining money supply growth and contracting money supply. Over 12 months money supply in the monetary union is still increasing by 1.3%, but over six months it's declining at a 2.8% annual rate and over three months it's declining at a 3.5% annual rate.

United Kingdom: The U.K. shows a somewhat more erratic deceleration in money supply with growth up by 0.5% over 12 months following at a -0.3% annual rate over six months and rising at a 1.1% annual rate over three months. The U.K. money growth rates are still substantially decelerated from what we saw over 2-years when money grew at a 3.2% annual rate and 3-years when it grew to 6.3% annual rate. Also, U.K. money stock data are one month behind the other countries because of data availability - that could explain some of their differences in pattern.

Japan: Money supply in Japan continues to grow and shows a very slight acceleration from 12-months, to 6-months, to 3-months with the growth rates progressing at annual rates from 2.5% over 12 months to 2.6% over six months to 3.2% over three months- they are tightly clustered more than trending. These rates compare to growth over two years of 3% and three years of 5%. Generally, growth in money has slowed in Japan but it is not as clearly slowing over this recent period as it is in the other monetary centers.

Real money balances erode Adjusting money supply for inflation puts just about all the money growth rates across all the countries in negative territory. In the EMU, negative growth rates extend back over two years. In the USA, negative real growth rates extend back over two years as well. In the U.K., negative real money growth rates extend back over two years. In Japan, over two years money growth is flat; falls by 0.9% over 12 months and then falls at a less-weak 0.4% annual rate over six months, and Japan manages to break with the rest of the group posting growth in real money balances at a 2% annual rate over three months.

Weak credit in EMU In addition to the weak money growth, the European Monetary Union is showing weak growth in private credit as well as in credit to residents. Both credit aggregates credit show declines in nominal credit extension over three months and over six months. Deflating the statistics for inflation, finds that real credit growth is falling over at least the last three years on both measures... and the pace of decline is accelerating.

Money and credit trends These sorts of trends in money and credit growth have economists thinking that inflation has peaked and that it's due to come down in the period ahead because money grows it's so weak and of course it's weak broadly across most of the major money center countries. However, it's also true that money supply is simply weakening after it had experienced booms in all these countries. In some sense, money growth is still only returning itself to a more sustainable long-term path and that's what makes money growth more difficult to interpret.