Economy in Brief: 2023

Japan's economy watchers index slipped to 53.6 in August from 54.4 in July. It's a small slip that still leaves the index with a very high queue standing at its 92nd percentile. The index is lower on balance over three-months, but it's higher over six months and higher by 8.1 points over 12 months. The month-to-month setback seems to be something of minor importance…but momentum is waning.

The future index also slipped back to 51.4 in August from 54.1 in July. That index has a queue standing at its 75.9 percentile, still a firm-to-strong standing but not as strong as the current index. The future index is also weaker over three months and slightly stronger over six months and stronger over 12 months as well, but by just a small amount.

Current index While the current index is lower on the month and it is a minor setback, all components were lower month-to-month except for retailing. There was substantial breadth to the step back in August small though it may be. Many components still have extremely strong rankings. For example, the household sector, retailing, eating & drinking establishments, and services all have queue percentile standings above the 90th percentile. A substantial portion of the economy is still quite strong nonmanufacturers as a group have an 86.6 percentile standing. However, housing has a below-median 39-percentile standing, corporations taken as a whole have a 78-percentile standing, manufacturers have a 64-percentile standing, employment overall has a 55.7 percentile standing not far above its historic median as the median occurs at a rank standing at the 50th percentile.

Future index The future index shows weakness across the board with the headline and all components weaker in August than they were in July. The headline weakens and shows weaker components across the board for three months. Over six months three measures show declines: eating & drinking places, housing, and employment. The rankings in the future survey are generally strong but not as strong as for the current index. The future headline has a 75.9 percentile standing, households, retailing, eating & drinking places, and services all have rankings in their 80th percentile. Housing has the weakest standing at a 37.9 percentile, employment is below its median at a 47.4 percentile standing, corporations is at its 66.4 percentile, manufacturers are at their 60th percentile and nonmanufacturers overall are at their 76th percentile.

Industrial production in Germany fell again in July, although the pace of decline let up from June. Industrial production fell by 0.8% in July following a 1.4% decline in June and a 0.1% decline in May; industrial production has fallen for three months in a row and in four of the last five months. Manufacturing output accelerated its decline, falling by 1.8% in July after falling by 0.9% in June. Manufacturing production had risen by 0.2% in May.

All three major sectors showed declines in output in July with consumer goods output falling by 1%, capital goods output falling by 2.9%, and intermediate goods output falling by 0.7%. This compares to June when only capital goods output fell, dropping by 3.3% while consumer goods output increased by 2.2% and immediate goods output edged ahead by 0.3%.

Sequentially, however, output continues to weaken as the 12-month growth rate is -2.2%, the six-month pace is -5.4% and the 3-month pace is -9.1%. Manufacturing mimics these declines with a 1.5% decline in output over 12 months, a 4.5% annual rate decline over six months, and a 9.5% annual rate decline over three months.

The construction sector drops in July, but it's sequential output path shows the deteriorating trend with construction output rising 0.8% over 12 months, falling at a 1.2% annual rate over six months and accelerating the decline to -3.5% annually over three months. Overall industry, manufacturing, and construction, deliver declining trends and declining trends that accelerate.

Real manufacturing orders and real sales in manufacturing both fell in July. Real sales fell for the second consecutive month-to-month decline; however, both real manufacturing orders and real sales show positive growth and a pickup over three months compared to six months, failing to echo the accelerating downtrend that we see for output overall and for manufacturing and construction in the industrial production report.

Industrial indicators for Germany show greater weakness in July compared to June for the ZEW current index, the IFO manufacturing index, IFO manufacturing expectations, and the EU Commission industrial index. The industrial indicators do not echo the decelerating trend from 12-months to six-months to three-months that we see for industrial output. However, each of these manufacturing measures is weaker over three months than it was over six months, indicating a greater move towards weakness over the last half year or so although not stretching the trend back to 12-months.

There are some early output data available for Portugal and Norway in July. Portugal shows output increase in July while Norway shows a decline. Norway shows industrial output falling in June; however, both Portugal and Norway demonstrate output declines over 12 months and worse declines over six months. But that trend transitions into growth over three months. Portugal shows output growing at a 10.7% annual rate over three months while Norway barely eeks out any gains at all rising at a 0.3% annual rate.

German orders turned sharply lower in July, falling by 11.7% month-to-month after rising strongly by 7.6% in June and by 6.2% in May. The sharp decline in July still does not turn the three-month growth rate negative. However, it sharply blunts what had been an incipient upturn and severely recasts the outlook for German manufacturing which for the past few months was seeming to have inexplicably brightened, whereas now it appears that May and June may have simply been a couple of rogue months of strength in an ongoing period of weakness.

Foreign vs. domestic trends Foreign orders in Germany fell by 12.9% in July after rising 11.9% in June and 6.8% in May. That series still carries a positive 17.5% annual rate of growth over three months. Domestic orders fell by 9.7% month-to-month in July after gaining 1.5% in June and 5.3% in May. For domestic orders, the three-month growth rate is a clear negative growth rate of 13.1%, at an annual rate. Over three months domestic and foreign orders are each moving rapidly and in opposite directions – that won’t last.

Sequential trends Sequential growth for German orders shows negative growth rates over 12 months and six months with those headline declines interrupted by a +3.8% annual growth rate over three months. That 3.8% gain is looking less authentic. It is out of context sequentially and strongly blunted in backtracking in monthly data. Foreign orders post a -11.1% annual rate over 12 months and a -12.5% annual rate over six months but grow at a strong +17.5% annual rate over three months. However, that three month-growth rate is severely crimped by the sharp downturn in July; it's extremely hard to understand what trend is really in play here for foreign orders in Germany. German domestic orders fall 9.8% over 12 months, followed by a 9.5% annual rate decline over six months, in turn, followed by a 13.1% annual rate drop over three months. The negative growth rates for domestic orders are persistent.

Quarter-to-date (QTD) orders In the quarter-to-date, because of the severe weakness in July, which starts the new quarter, we are looking at negative growth rates of 23% to 36% for total orders, foreign orders, and domestic orders in the newly started third quarter.

Real sales by sector Real sector sales for Germany show declines in July as sector sales in all the categories in June as well as in July; that compares to increases in all the categories but one in May. Even so, real sector sales growth in manufacturing is up by 1.4% over 12 months, flat over six months, and up at a 4.1% annual rate over three months. Consumer goods show negative growth rates over 12 months, six months, and three months. Capital goods show positive growth rates of 7.9% over 12 months, 2.3% over six months, and at a 12.1% annual rate over three months, demonstrating consistent growth and even acceleration on the three-month horizon. Capital goods manage to do this with the two most recent months showing significant drops in real sales- that undermines the trend. Intermediate goods show sales falling by 5.2% over 12 months, falling at a 1.4% annual rate over six months, and falling at a 3.3% annual rate over three months. Overall, the sales numbers generate positive gains over three months, but the sequential growth rates are not compelling – nor is the sector detail.

QTD trends broadly weak In the quarter-to-date calculus for the first month in the new quarter, there are negative growth rates across the board for all the categories of sales: headline sales, and manufacturing sales, both fall at a 4.6% annual rate. In the new quarter, the deepest decline is from consumer durables at a -20.9% annual rate.

EU Commission indexes show euro-weakness The EU Commission industrial confidence reading for Germany, France, Italy, and Spain shows negative readings for all four of those countries in July as well as in June and May. There is no hint of the German mid-year strength in orders. The industrial monthly changes on these metrics in June show deterioration for all countries on all horizons except for France; it registers a slightly less negative number in June compared to May, but then the French industrial metric posts a large negative reading for July. The industrial indexes in Germany, France, Italy, and Spain show worsening from 12-months to six-months to three-months for all four countries. The current queue standings for the industrial confidence measures for the four countries show the strongest readings for Italy and Spain with queue percentile standings in the lower 30th percentiles. Germany, and France post even weaker queue percentile standings in their 26th to 27th percentiles. All of these are weak readings.

Since Covid struck... Taking a longer perspective, looking at all the variables in the table compared to where they were in January 2020, before COVID struck, everything is weaker than its January 2020 level except for capital goods shipments; they are stronger by 4.2%. Total orders are lower by 8.4%, real sector sales and manufacturing are lower by 1.8%, and the EU industrial confidence indexes are lower by 1 to 2½ points in Germany and Italy and lower by about eight points in France and lower by 12.6 points in Spain.