Economy in Brief: April 2022

The S&P Global flash PMIs for EMU in April advanced to 55.8 from a finalized 54.9 in March. The manufacturing reading slipped lower to 55.3 on a flash basis compared to its finalized March value of 56.5. The flash services reading rises to 57.7 in April compared to a finalized 55.6 in March. The service sector improves on the month while manufacturing steps back. Due to the weight of services, the overall composite index improves.

These readings are for April and by now they represent about two months of time that has passed since the Russia-Ukraine war broke out. The impact on the PMIs over this period is mixed. EMU manufacturing flash is at 55.3 in April compared to 58.2 in February; the services flash at 57.7 in April compares to 55.5 in February. Manufacturing is weaker and services is stronger in line with their respective month-to-month change as well. Of course, two months is not much time to pass, and the sanctions were not imposed exactly from the outset of the conflict and so we should be wary that there may be more repercussions to come in the months ahead.

In the discussion that follows, it will be understood that any reference to April data refers to a flash estimate and any estimate to historic data refers to finalized estimates.

For Germany, the results are slightly different. The composite is weaker month-to-month along with manufacturing while services are stronger month-to-month. Comparing April to February for Germany, the composite is lower, manufacturing is lower, but services are stronger.

For France, the composite is stronger month-to-month along with both manufacturing and services. Compared to their February values, manufacturing is weaker, but services are stronger and the composite is stronger overall.

For the U.K., month-to-month the composite and services are weaker while manufacturing is stronger. Compared to February, both sectors as well as the composite are weaker in the U.K.

In Japan, the composite is slightly stronger, and services are slightly stronger ticking up to a diffusion value of 50.5 showing expansion which is a reversal from earlier months. Manufacturing, however, is weaker month-to-month in Japan. Compared to February, all the Japanese readings are stronger in April.

The U.S. shows mixed performance with the composite weaker month-to-month, manufacturing stronger and services showing significant weakness compared to March. Comparing the April values to February, the U.S. composite is weaker and services are weaker, but the manufacturing sector is stronger.

The S&P Global PMIs show mixed patterns for broader changes as well. Over three months, all the EMU readings are weaker; the same is true for the U.S. However, for Germany, the composite, the manufacturing and the service sectors all are stronger over three months; France, the U.K., and Japan show mixed conditions. Over six months, the European Monetary Union shows the composite, the manufacturing sector, and the service sector are weaker. Germany, the U.S. and the U.K. show that same result. In contrast, Japan shows three stronger readings. France shows weakness except for services that are stronger over six months.

Over 12 months, all sectors and all these reporting units have stronger readings.

The queue (or rank) standings show some significant differences across countries and areas. The European Monetary Union has a composite ranking in its 80th percentile, France is at its 94th percentile; the U.K. is at its 82nd percentile. However, Germany has only a 64-percentile ranking. The U.S. is only at its 56th percentile with Japan in its 66th percentile standing. For France, the composite index is very strong; for the U.K. and EMU there's significant strength; however, elsewhere, composite indexes show only moderate firmness.

Manufacturing is in its 80th percentile or better in the U.S., Japan, and France. The standing is in the 60th percentile for the European Monetary Union and for the U.K. For Germany, the standing for manufacturing is only in its 47th percentile, below its historic median for this period.

However, it is the service sectors that show the most disparity. In the European Monetary Union, the services sector has a 92-percentile standing; the same standing holds for Germany. For France, the standing is even higher at the 98th percentile, marking an all time high for this period. In the U.K., the service sector has an 84-percentile standing, but in Japan, the service sector only has a 52-percentile standing. In U.S., the service sector has an anemic 45-percentile standing, below its historic median.

Total German industrial orders fell by 2.2% in February after gaining 2.3% month-to-month in January and 2.4% in December. This decline ends a strong run for orders in Germany. February, of course, is the month in which the invasion of Ukraine began - it was in late-February - so we are likely still looking ahead to the impact of that invasion on German orders. As things stand, over 12 months German orders are rising 2.9%, over six months the annual rate bumps up to 4.8%, and over three months the annual rate of expansion is at 10.2%. German orders are still on an accelerating trend, but it looks like that's about to be cut short by war.

Foreign orders German foreign orders have been a little bit more irregular month-to-month; they fell by 3.3% in February after rising 9.5% in January and falling by 3% in December. Foreign orders are up by 4.1% over 12 months, they rise at an 8.6% annual rate over six months and accelerate to an 11.2% pace over three months.

Domestic orders German domestic orders fall by 0.2% in February after falling by 7.2% in January and rising by 10.5% in December. Domestic orders rise by 1.3% over 12 months, they fall at a 0.6% rate over six months and then they rebound to rise at a 9.4% annual rate over three months. German domestic orders are weaker overall than foreign orders and their path is one that is more erratic.

Quarter-to-date In quarter to date basis, which is two months into the current quarter, total orders are rising at a 19.8% annual rate. Foreign orders are rising at a 41.5% annual rate while domestic orders are falling at a 6% annual rate.

Real manufacturing and mining sales patterns Real sales by sector are more erratic than orders have been. Real sales from mining and manufacturing fell 1.4% in February after rising 1.5% in January and gaining 0.8% in December. Sequentially, mining and manufacturing sector sales are rising, but apart from showing growth there is no acceleration. Over 12 months sales gain 4.2%, that accelerates sharply to 17.2% over six months then backs down to a 3.6% annual rate over three months. Manufacturing sales by themselves show the same pattern.

Real manufacturing sales by sector While sales by sector are also erratic, they show growth. Consumer goods sales rise 5.8% over 12 months, slip back to 4.8% at an annual rate over six months and then jump to an 8.5% annual rate over three months. The strength in sales comes from consumer durables that rise by 7% over 12 months, increase their pace to 12.6% over six months and then accelerate further to 22.7% annual rate over three months. In contrast, consumer nondurable goods sales are more erratic, rising by 5.5% over 12 months, slowing into a 3.2% annual rate over six months and then rising at a 6.1% annual rate over three months. Capital goods rise by 1.4% over 12 months, accelerate to a sharp 28.3% annual rate over six months and then decline at a 5.2% annual rate over three months. Intermediate goods show a 3.7% growth rate over 12 months, rising to a 6.9% pace over six months following back to a 3.9% pace over three months. Real sector sales are much more sluggish than orders. Orders usually lead, but this gap could also reflect supply chain problems.

Quarter-to-date by sector Quarter-to-date growth rates by sector show a 12.9% annual rate for manufacturing with overall consumer goods at a 5.4% annual rate, led by a 17.2% annual rate for consumer durables and held back by a 3.5% annual rate for consumer nondurables. Capital goods sales are rising at a 17.2% annual rate; intermediate goods gain at just a 0.9% annual rate.

Big Four EMU economies and their EU metrics The industrial readings according to the EU industrial confidence index show different patterns for the largest economies in the European Monetary Union. For Germany, the net readings are strong, but they decay from December to January to February; they also show sequential monthly decay in Italy. France shows an erratic monthly pattern while Spain shows monthly acceleration. The queue standings for each of these countries that place the current reading in a ranked queue of data since 1990 show all of them to be strong, in their 90th percentile or higher for this period. Spain has the highest relative standing at 99.7%, followed by Germany at 98.7%, France at 94.7%, and Italy at 92.8%. According to the EU data, the industrial sectors are strong in all these countries – this is ahead of the outbreak of war...

Compare to the pre-Covid situation Looking at changes back to January 2020 before the Covid struck, we see the largest gain and the German industrial sector where its EU index is up by 36.5 points; for France, Italy and Spain, the indexes are up by 12 to 14 points for the period. On the same timeline, German orders are up by 7% with foreign orders up 7.1% and domestic orders up by 6.9%; these metrics reveal a tightly clustered sense of rebound. However, sector sales are very different matter. For Germany, mining and manufacturing sales are down by 1.3% on this timeline while manufacturing alone has sales down by 1.2%. Consumer goods sales are down by 0.4% although durable consumer goods sales are up by 6.1% and consumer nondurables sales are down by 1.5%. Capital goods sales are down by 5.8% while intermediate goods post an increase of 2.9%. Order-versus-sales metrics look very different.

Japan's trade deficit remained in force in March. While it improved slightly month-to-month, it continued to hover near its largest recent deficit reading. Japan now has a string of 12 consecutive monthly deficits on its trade account. These deficits are back in force after a previous string of 22 monthly deficits over 25 consecutive months in 2018-2020. Japan, once the most dominant exporter globally with seemingly structural trade surpluses, has become a persisting-deficit country. What happened?

Japan's trade deficit shifts – explained by oil In 2008, spiking oil prices pushed Japan's trade into deficit. Then oil prices backed off and the Japan's surplus returned. In 2011, Japan was hit with a Tsunami, an earthquake, and a nuclear accident – a trifecta-storm of trouble. With world oil prices fluctuating around $100 per barrel, Japan's trade deficit plunged deeper into the red-ink zone as Japan began to import more oil. By 2012, all Japan's nuclear power stations were shuttered, in response to the natural-disaster-induced nuclear accident and Japan was back dependent on oil imports. In mid-2014, with Japan's deficit well-established, oil prices suddenly collapsed, helping to swing Japan's trade deficit back into surplus. After spot oil fell to a low in May 2016, Japan's surplus shot up. Then, again in April 2020, oil prices fell briefly below $20/barrel and Japan's deficit contracted sharply- and briefly. Since then, Japan's deficit has re-emerged and grown as oil prices have surged. The story of Japan's trade balance is largely a story of oil and Japan's experiences in shutting down its nuclear power plants. Today Japan's trade picture is still painted by the whims of global oil.

The chart (above) shows only the recent deficit behavior. Export and import growth rates each have flattened out with imports holding to higher growth than exports. As a result, the trade situation is deteriorating with the deficit is plunging again and a good part of that is because of oil prices.

The yen has been steadily weakening without much impact on trade flows so far.

Real trade flows Export and import prices both rise at a 20% annual rate over three months, but over 12 months import prices are up by a much stronger 33% compared to 13% for exports. Meanwhile, real export growth has been flat or negative while real imports have accelerated, logging a 14.6% annualized gain over three months.