Economy in Brief

In May, the finalized industrial production figures for Japan show that IP has fallen by 7%; the decline in manufacturing is 7.5% month-to-month. Yes, these are month-to-month percent changes; they show declines that are extremely severe. Not only that, but Japan has total industrial production falling for three months in a row. Manufacturing industrial production is falling for two of the last three months.

Over three months industrial production in Japan is declining at a 30.4% annual rate. In manufacturing it's declining at a 30.3% annual rate. Over six months the two series decline at about a 16% annual rate and over 12 months the two series decline by 4% or more. These are severe conditions and very discouraging trends.

Japan's economy is in a very difficult situation right now, experiencing declines in output and a yen that continues to get weaker.

Japan's household spending has been weak, having slipped by 0.5% in May on a year-over-year basis. Rising prices are putting Japanese consumers under pressure and making them cautious.

Japan also continues to suffer the repercussions from the ongoing China COVID-19 curbs. Japan's largest trading partners are China and after that the United States.

The chart at the top (Japan's IP Sequential Growth Rates) is the usual sort of growth rate chart for industrial production. It looks at sequential annualized growth over three months, six months and 12 months in an attempt to identify changing trends. It shows flatness and some weakness from mid-2020 onward (after the big drop in output) amid some rebounding as well as output has been volatile.

The table also shows growth rates over these various periods for industrial sectors as well as the quarter-to-date growth rates by sector. The QTD growth rates are nearly all showing declines in progress – mining is the only exception. I have also included the net growth in industrial production and in various sectors since COVID struck, providing a comparison with levels prevailing in January 2020. And that shows declines everywhere except for utilities.

Output in the euro area rose by 0.8% in May after rising 0.5% in April. The manufacturing sector logged a gain of 1.4% in May after rising 0.1% in April. However, for both metrics, output is now declining on balance over three months. Overall industrial production is declining at a 1.9% annual rate over three months while manufacturing IP is falling at a 1.1% rate over three months. Both measures show net declines in the current quarter-to-date that has two out of three months' worth of data in hand.

The manufacturing sector in the EMU shows increases in two of three sectors in May with intermediate goods output being flat, consumer goods output up by 1.6%, and capital goods output up by 2.5%. Consumer goods output rose for two months in a row and in two of the last three months. Capital goods output rose in May after declining in both March and April. Intermediate goods output rose in April but declined in March.

Over three months, consumer goods output is rising at a 6.1% annual rate, intermediate goods output is falling at a 4.8% annual rate, and capital goods output is falling at a 6.4% annual rate. Intermediate goods output shows ongoing decay: there is a 0.2% decline over 12 months, a flat performance over six months and then a 4.8% decline over three months. Capital goods output shows declines over all three periods: a 1.4% decline over 12 months, a 0.8% decline over six months, and a 6.4% decline over three months. Consumer goods alone show increases over all horizons, rising by 6.5% over 12 months, at a 10% pace over six months and at a 6.1% pace over three months.

In the quarter-to-date, consumer goods output is rising at the double-digit pace of 12.1% annualized, intermediate goods output is falling at a 1.7% annualized rate, and capital goods output is falling at an 8.8% annual rate. The strength in output clearly is concentrated in the consumer sector.

Output by nation
Of the 13 EMU countries listed in the table for May, five show output declining with the rest showing output gains on the month. Six countries show declines in output in April and five show declines in March. Output continues to increase in more countries than it decreases and that has been persistent. Still over the last three months, there is a substantial core of countries that are showing output declines marking the industrial sector as somewhat uneven.

However, taking the whole three-month period, there are output declines in only four of the 13 EMU members. Looking at output over six months, there are only three countries that have output declining on that horizon; those are Germany, Malta, and Portugal. Over 12 months, four countries show output declines. In the quarter-to-date, there are output declines in five of the 13 reporting EMU members.

Looking at the recovery in output compared to its pre-COVID level in January 2020, output has increased on balance in 9 of 13 countries; the exceptions are Germany, France, Malta, and Portugal. There are double-digit output increases as well: Ireland, the Netherlands and Belgium log double-digit gains since January 2020 and Austria and Greece log strong increases in output greater than 9%. Manufacturing in the euro area has progressed with firm output trends since COVID struck although the overall gain in the EMU-area manufacturing output on that period is only 1.1%.

Results for three European countries that are non-EU members, the U.K., Sweden, and Norway, demonstrate somewhat mixed results. Norway shows output declines over 12 months, six months, and three months, but the pace of decline is gradually dissipating over those horizons. Both the U.K. and Sweden show output increasing over all three horizons and accelerating increases.

If you were to accentuate the positive and eliminate the negative this month, there would be almost nothing left of the ZEW survey. In July, the ZEW assessments have generally weakened across the board except, of course, their perceptions of inflation which are stronger. A look at the chart at the top shows how much since COVID has struck the fortunes of the euro area have aligned with the assessments for Germany. Since COVID struck, the tracking of the two conditions indexes is extremely close, much closer than in the pre-COVID period.

The disease
Table 1 provides verbal descriptions of the month-to-month changes of the various entries. Color coding is used to demonstrate whether the underlying reading is above its median or not. The color 'black' indicates an underlying rank reading (value in Table 2) that is greater than a 50th percentile standing which notes in each case the historic median value. Values in 'red' denote weaker-than-median standings. Bad news, if not weakness is expected everywhere, short-term rate expectations, and a weaker euro-the currency rate (stronger dollar), lower long-term rates, a weaker stock market performance except for stock prices in the U.S., and higher inflation all around (the exception to 'weakness but not to 'bad news'). Only short-term rates, long-term rates in Germany and the dollar (not the euro) have stronger-than-median percentile standings underlying their month-to-month readings.

The main regions of the OECD leading indicators show declines in June. The all-area OECD metric, EMU members of the OECD, and the U.S., show small 0.1% declines with Japan showing a flat reading month-to-month for the second month in a row. Over three months, all regions show declines ranging from 1.6% to 2% except for Japan that logs a 0.3% increase. Over six months, all regions except Japan also showed declines like their three-month declines. Over 12 months, all regions show increases. The leading economic indicators led by the U.S. have a 4.5% gain followed by the top seven OECD countries with a 4% gain. Japan shows the weakest gain at 2.7%. The data show weak economic signals as a recent event. Evaluating the current indexes according to their queue percentile standings, Japan has the highest standing with a 75.7 percentile standing; the other regions, the OECD, the top seven OECD countries, the euro area members of the OECD, and the U.S. have standings in their respective lower 30th percentile of their historic ranges. These rankings are based on the levels of the indexes in June. Current standings are broadly weak.

The second panel of the table shows changes in averages to smooth the process out. These panels give roughly the same signals as in the top panel, showing declines in May and June with the declines over the recent six months and even over six months ago. The six-month change of 12-months ago shows across the board increases.

Looking more closely at regions and individual countries and evaluating them by the level of their indexes in the bottom panel of this first table, we see indexes below 100, indicating below-normal growth for all entries except Japan. This is true for June and for May observations; in April, Germany shows a value that is not below 100. In March, only the OECD, the European Monetary Union, Japan, and Germany show values at or above 100. However, apart from these exceptions, we see evaluations of growth below normal for all these countries and regions. March is right after Russia invaded Ukraine and it is when the Fed's rate hikes began. The change column marked 'now' looks at the ratio of the current observations to six-months ago which is a favorite way to evaluate these leading indicators: on that basis, only Japan is higher in June then it was six-months ago. The far-right hand column evaluates these current indexes historically. On that basis, only Japan and Germany have standings above their 50th percentile; that level marks their historic medians. The weakness indicated by the economic indicators is broad-based and has worsened since March.