Economy in Brief

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.

Job trends in Canada show employment gains picking up steam in the goods sector while they are slowing down in the services sector. However, much of that comes from the changes in the month of June where services jobs fell by 75,700 and goods sector jobs rose by 32,500 after two months of declining.

Service sector jobs declined by 76 thousand in June after logging solid gains in the previous two months. Service sector jobs show gains over three months, six months, and 12 months. Goods sector jobs show a decline over three months with gains over six months and 12 months. This month's drop is only the third service sector job decline in the last 14 months. The goods sector is coming off back-to-back declines that are its first back-to-back declines since mid-2021 when COVID was still a factor and when the sector experienced five monthly declines in a row.

Over 12 months, employment is up by 4.2% led by a 4.4% gain in the services sector with goods sector employment up by 3.7%. Over the broad 12-month period, both sectors are showing solid job growth.

Canada's unemployment rate fell to 4.9% in June from 5.1% in May, despite the decline in employment as there were fewer people seeking employment. The unemployment rate has fallen by 2.7 percentage points over the last 12 months. And over the last 12 months, the labor force participation rate has edged lower by 0.1 percentage points creating a minor tail wind for the unemployment rate to improve.

Job gains have been especially rapid in construction, where jobs are up by 8% over 12 months. Despite some increases in interest rates, construction jobs increased by 23,000 in June after several months of showing job declines.

Service sector jobs showed the strongest 12-month growth in information and culture followed by accommodation & food services, public administration, and professional & technical jobs. The category of “other" is the only major jobs category in services that shows job declines over 12 months. In the goods sector, agriculture shows a net decline over 12 months along with forestry and mining.

German industrial production rose for the second month in a row in May. The headline for IP increased by 0.2% following an April rise of 1.3%. However, those two increases followed a substantial drop of 4.2% in March. As a result, the three-month annual rate decline in German industrial production is at a -10.3% annualized rate, the decline over six months is at a -1.6% pace and the decline over 12 months is -1.4%. German industrial production is declining; its decline is accelerating despite increases in output over the last two months

Monthly sector patterns
In May, consumer goods output fell by 0.9%, dropping for the third month in a row. Capital goods output rose by 2.2%, rising for the second month in a row, after a 3.7% increase in April. While that two-month string of increases seems impressive, it still does not get industrial production out of the hole since capital goods output in March fell by 7.8%. For intermediate goods, the output trend has been hot and cold: intermediate goods output fell by 0.4% in May, rose by 0.7% in April and fell by 3.3% in March

Sequential trends in IP by sector
Looking at these three industrial production sectors, what we see is clear deceleration. For consumer goods, output rises by 2% over 12 months, eases to a 0.4% rate of increase over six months and then falls at an 8.5% annual rate over three months. Capital goods also show clear sequential deceleration with a 0.2% decline over 12 months, a drop at a 3.5% annual rate over six months that accelerates to a decline at an 8.9% pace over three months. Intermediate goods do not show sequential deceleration per se; however, they do show declines over all three sequential periods. They log a 4.1% decline over 12 months, a smaller decline over six months, then register an 11.4% rate of decline over three months. While the six-month decline is not as severe as the 12-month decline, the weakness steps up over three months. In fact, over three months, intermediate goods output is weaker than any of the other sectors that are showing sequential declines.

Manufacturing output orders and sales
Manufacturing output, taken by itself, shows that output increased by 0.5% in May after a 1.9% rise in April. Those increases compare to a 4.8% drop in March. Manufacturing output in Germany shows sequential deterioration from a -1.3% annual rate over 12 months to a -1.9% pace of decline over six months to a -9.8% annual rate over three months. Real manufacturing orders also show persistent and sequential decelerations with orders falling by 3% over 12 months, following a 5.2% annual rate drop over six months, and then falling at a 21.1% rate over three months. Sector sales in manufacturing adjusted for inflation rise by 1% over 12 months, fall at a 1.2% pace over six months and fall at an accelerated 5.5% decline over three months. Sector sales adjusted for inflation also are showing this persistent deceleration. Reports on German output and on manufacturing are consistently weak and all the sectors and all these metrics show declines in the quarter-to-date as well.

Other German indicators
We can also look at some industrial indicators for Germany: there's the ZEW current index, the IFO manufacturing index, the IFO manufacturing expectations index, and the EU Commission industrial index. Some of these are net diffusion indexes and some of these are just raw indexes so that the raw index level month-by-month isn't necessarily meaningful when compared across indicators. But if we look at the average levels for all these variables and how they change, we see secular deterioration: all four of these industrial gauges (1) the German current situation, (2) the manufacturing situation, (3) manufacturing expectations, and (4) the EU industrial index – all get weaker from 12-months to six-months to three-months.

Indicators quarter-to-date
In the quarter-to-date, the ZEW current index weakens by 4.1 points and EU Commission index weakens by 0.2 points. However, the IFO manufacturing index increases by 0.7 points and the IFO manufacturing expectations reading improves by 1.6 points in the current quarter-to-date.

IP elsewhere in Europe
Other early-reporting European countries, three of them European Monetary Union members, report manufacturing IP for May. None of them show the sequential deterioration that we see in Germany. France shows a 2.2% gain its index over 12 months that accelerates to a 2.9% annualized pace over six months but then collapses to a 0.3% decline over three months Spain shows persistent acceleration. Sweden, an EU member, shows persistent acceleration. Portugal shows a 3.1% gain over 12 months, a decline in output over six months, then a stronger 9.7% annualized gain over three months.

Quarter-to-date trends
The German economy, the largest in Europe, is showing some of the weakest and consistently weakest results in May in the quarter-to-date. Other early-reporting European economies show mixed trends. France shows a decline in the quarter-to-date with industrial production falling at a 3% annual rate. However, Spain, Portugal, and Sweden all show increases in industrial production in the quarter-to-date as of May.

IP growth since Covid struck
Germany also shows declines in industrial production for its headline, for manufacturing overall, for construction, and for the three main manufacturing sectors compared to where these indexes stood in January 2020, just before COVID struck. However, among other European reporters, trends are more diverse. Industrial production in France is weaker than it was in January 2020. Portugal is weaker than it was in January 2020 as well. But both Spain and Sweden show industrial production stronger than the indexes were over two years ago.