Economy in Brief

Japan's trade report posted sobering trends in May as Japan's deficit shrank from April, continuing a round of improvement as the trade deficit has improved in six of the last seven months.

Japan's trade flows tell a story of weakening global economic growth as well as of weakening growth in Japan. Japan's nominal export growth has declined over 12 months, 6 months, and 3 months. Imports also show declines over 12 months, 6 months, and 3 months. In neither case, is the nominal decline sequentially worsening, although in both cases the 6-month and 3-month pace of decline is at a greater rate than the 12-month decline.

Trade flows are contracting Real exports and real imports both fell in May, with exports falling by 4.6% and imports falling by 7.3%. Looking back at sequential trends of real exports, as for the nominal flows, there are declines over 12 months, over 6 months, and over 3 months. Once again, the declines over 3 months and 6 months are both greater than the pace of the decline over 12 months. This indicates a general deterioration in the pace of trade flow growth, but there is not a clear-cut monotonic decline in the growth rates. For imports, there are also negative growth rates over 12 months, over 6 months, and over 3 months. And - like for the nominal counterparts, and as in the case of exports as well - there's no clear-cut sequential trend deceleration in progress although over 6 months and 3 months the declines in growth rates are at a greater pace than the decline over 12 months.

Growth is slowing... These general trends indicate that global growth is weakening because Japanese export volumes are weakening. Import volume weakness suggests that Japan's domestic economy is weakening as well. Japan's nominal import declines show greater weakness than real declines because import prices are weakening faster, largely because of weakness in oil prices.

The yen is weakening In this environment, the yen has slipped against the dollar falling by 6.4% over 12 months, rebounding slightly to rise on balance over 6 months, then falling by 12.6% over 3 months. The real broad yen index, an index of the yen expressed in real terms and against a broad basket of currencies, mirrors the movement in the nominal yen against the dollar. This real, broad-based, measure is lower by 4.2% over 12 months, has a slight rebound over 6 months, then falls at a 6.9% annual rate over 3 months.

Industrial output in the European Monetary Union grew by 1% in April with manufacturing shooting up by 3.7%. Hold the applause on this, however. Because this is a rebound from a larger 3.8% drop in March and a larger 5.8% drop in manufacturing output. While output overall and in manufacturing had gained in February, the 3-month change shows a decline in total EMU industrial production had a 5.8% annual rate over three months compared to manufacturing where there is a decline of 4.6% at an annual rate. The outsized increases posted in April do not reverse the trend weakness in industrial production or in manufacturing output in the European Monetary Union.

April: strong with isolated strength April's rebound, in fact, is wholly the result of strength in the capital goods sector where output surged by 14.7% after contracting by 15.2% in March. Consumer goods output fell by 2% in April, intermediate goods output fell by 1%. Both consumer goods and intermediate goods output have fallen for two months in a row. The strength that appears in April industrial production and in manufacturing output is wholly the result of a partial recovery in capital goods output.

Sequential rates of growth flag weakness Sequential rates of growth in overall output and in manufacturing output show progressive deterioration. For manufacturing, there's a 1.3% gain over 12 months, a 2.7% annual rate decline over 6 months, and a 4.6% annual rate decline over 3 months - that's a clear worsening pattern. Consumer goods output comes close to showing a deteriorating trend, but minor differences in the growth rates between 3-months and 6-months prevent that from occurring. Consumer durable goods output shows progressively smaller declines from 12-months to 6-months to 3-months. Nondurable goods output carries the day for progressive weakening trends. Intermediate goods also show diminishing sequential weakness as a 6.1% decline over 12 months becomes a 5.1% annual rate decline over 6 months and diminishes further to a 4.7% annual rate fall over 3 months. Interestingly and ironically, capital goods endorse the progressive deterioration trend with the 9.5% increase over 12 months, a weaker 0.3% annual rate decline over 6 months and a 3.7% annual rate decline over 3 months.

Country patterns Country patterns show broad output declines for manufacturing across 13 EMU countries reporting in April with eight showing declines in manufacturing (all of them, month-to-month declines of 1.8% or more). Country data also show 9 EMU members with output declining in March. March and April show much worse conditions than February when only 3 EMU countries showed month-to-month declines in output. Over 3 months eight European monetary union countries show output declines, seven countries show declines over 6 months, six countries show declines over 12 months. However, if we look at the median results for these countries, the median decline is 3.1% over 12 months that shrinks to a 1% decline at an annual rate over 6 months and then expands back to a 2.3% annual rate decline over 3 months, imposing no clear secular pattern, but showing persistent declines. However, over these three periods, as well as over the three most recent months, fewer than 50% of the reporting countries show output is accelerating when we evaluate it period-to-period. For example, output over 12 months is accelerating compared to 12-months ago in only 36% of the categories. That improves over 6 months as over 6 months 46% of the categories show output accelerating compared to its 12-month pace. However, over 3 months, only 36% of the categories show improved growth rates compared to what they log over 6 months.