Economy in Brief: January 2023

The IFO gauge improved in January. It has been improving since reaching its low point in September to October of last year. In January, the all-sector climate index improved to -7.2 from -11.5 in December. All the components improved; the service sector reading moved to a positive reading of +0.2 in January from -1.2 in December.

Expectations are responsible for the bulk of the improvement month-to-month. Overall expectations improved to -18.8 in January from -25.6 in December. The current business situation, however, deteriorated to a 14.4 reading in January from 15.2 in December.

While the current conditions index edged lower month-to-month, the manufacturing sector improved to a 17 reading in January from 13.7 in December. Also improving was the retail sector, which is the lone net-negative reading for January. It improved to -2.3 in January from a worse -5.4 level posted in December. Deteriorating month-to-month were the construction sector, wholesaling, and services.

Expectations showed improvements across the board. However, all the expectation readings have net-negative values. This indicates that IFO respondents are still negative on the future. But they're not as negative as they were in December.

Ranking data as evaluators Ranking data provide a means by which to evaluate the diffusion readings. The standings I will refer to next are based on the percentile position of the relevant categories when placed in their historic queues of values back to March 2005. In this system, 100% is the highest possible reading; 0% is the lowest. Percent of range data (percent of high-low values) also are presented in the table. These are very different concepts.

The diffusion score for the climate all-sector index has a ranking in its 16.7 percentile. That means that since March 2005, the all-sector climate index has been this weak or weaker only 16.7% of the time. The sectors reported in the table are manufacturing, construction, wholesaling, retail and services. They show standings that range from a low of 11.1 for services, to a high standing of 21.9 for manufacturing. All of them are in the bottom 25 percentile of their respective queues of data. And some of them are much lower in that percentile cohort.

Current conditions show the all-sector index, at a 23.7 percentile standing. The current index is in the bottom quartile of its historic queue of data. The construction sector is the only sector with a reading above its 50th percentile, which tells us it's above its historic median on this timeline. The construction sector has a standing at its 61.4 percentile. After that, the next strongest reading is a 41.4 percentile reading in retailing, followed by a 35.8 percentile reading in wholesaling and at a 33-percentile standing in manufacturing. The service sector is weakest, at a 20.5 percentile standing.

The real weakness in the IFO framework is in expectations. The all-sector expectations standing is in its 8.4 percentile, the bottom 10-percentile of its historic queue of ranked data. The strongest reading among sector expectations is in manufacturing with an 11.6 percentile standing – still not impressive to say the least. The weakest reading is construction at a 3.3 percentile standing. The relative weakness in construction is not surprising, since it's the sector that performs the best right now in the current situation. Apparently, there are expectations that this performance is going to be short-lived. Survey respondents see it as having perhaps the farthest to fall compared to other sectors that are already performing worse in their current conditions.

Performance since COVID As another benchmark on performance, we look at data since January 2020, before COVID struck. All the climate readings are now lower on that time horizon. Current conditions show all the January diffusion values are below their January 2020 levels except for manufacturing. That sector’s current reading is higher by 11.1 diffusion points. The largest drops in the current framework are in construction, which is 34 diffusion points lower, services that are 24 diffusion points lower, and retailing that is 21.3 diffusion points lower. Expectations also show across the board declines since January 2020. The all-sector diffusion index is 12.7 points lower. The smallest drop is from manufacturing, where expectations are only 5.3 points lower. That drop is followed by services, with the January expectations index only 15 points lower. However, there's much more severe weakness in construction, which is 34.8 points lower, wholesaling, which is 20 points lower, and retailing that is 24 points lower.

On balance, the IFO readings in January continue to show weak and weakening current conditions, tempered by some improvement in expectations – that are themselves still exceptionally weak. The climate index has improved month-to-month. But the individual sectors continue to have extremely weak readings on both current conditions and for expectations with across the board much weaker readings.

The flash PMIs from Standard & Poor’s in January resemble a Fleetwood Mac song as they go their own way. Conditions are stronger in the EMU region as well as in Germany. But the composite PMIs are weaker in France, the U.K., Japan, and the U.S. However, for manufacturing, it's a different tune. Manufacturing improves in January in the EMU region, Germany, France, and the U.K.; it weakens only in Japan and the U.S.

Still, we're talking about month-to-month gyrations here. The historical averages show all regions weaker on average over three months compared to over six months and most regions are weaker on their six-month averages than on their 12-month averages. Japan’s headline composite and its service sector are the only exceptions. Year-over-year changes based on average data are different, with service sectors stronger in the EMU, France, the U.K., and Japan. Bolstered by service sector strength, the French composite is also stronger year-over-year. Japan’s composite is stronger year-over-year as well, and so is its manufacturing gauge.

Period to period changes Some of the month-to-month changes (second to last column on the right) are substantial with the German composite up by 4.6 points and the EMU composite up by 2.9 points. But in France, the composite is lower by 1.2 points, in the U.S. by 1.6 points, in Japan by one point, and the U.K. deteriorates by 0.4 points, month-to-month.

Over three months, the German composite is up by 5.6 points, the EMU composite is up by 3.1 points and the U.K. composite is up by 0.6 points, but the U.S. is lower by 1.6 points with Japan and France both lower by one point. These results indicate fewer uniform changes even over three months.

Standings in January The queue standings show all the observations in January, below their historic medians calculated back to January 2019 - except for Japan where services and the composite have relatively strong percentile rankings for the period. The U.S. and U.K. have the weakest composite standings on this period, in their respective 12th percentile and 14th percentile. France has a 24.5 percentile standing. Germany has a 28.6 percentile standing. The European Monetary Union has a 32.7 percentile standing. Manufacturing gauges for these regions range from a low percentile standing of 6.1% in the U.S. to a 38.8 percentile for the EMU and France.

The big picture… In the big picture, there's still a great deal of weakness in the highly developed country area, not only are the percentile standings low but most of the reports show declines for the composite and the manufacturing and in services indexes compared to the January 2020 levels, the levels that prevailed before COVID struck. The exceptions are that all three Japanese measures are somewhat higher than that level and in Germany manufacturing is now 1.7 points higher than it was in January 2020. All the rest of the gauges are lower on balance. That finding signals no growth and in fact a step back for most of these observations over a three-year span. Among the 18 PMI readings in January for the 3 sectors across six areas, only 6 (one-third of them) show PMI diffusion readings of 50% or higher – and no reading is even as high as 51%. It’s fair to say all reading are clustered around ‘unchanged’ or lower.