Economy in Brief

Japan's economy watchers index in February tipped slightly lower to 37.7 from January's 37.9; this small backtracking compares to a reading of 57.5 in December. Clearly the economy watchers index in the year 2022 has the economy on much weaker footing than it had been at the end of 2021.

The facts: Over the last three months the economy watchers index is down by 19.1 points; over six months it's up by 2.8 points; over 12 months it's down by four points.

Over the past year the economy watchers index has barely changed and has not been very volatile. It is slightly stronger over six months; it's slightly weaker over 12 months. The queue standing of the index in February is at its 13.4 percentile, a level that marks it as being weaker since 2002 only about 13% of the time. The economy watchers index tells us that Japan's economy continues to struggle as of February.

Current component trends These general points about the economy watchers index permeate the various components which show, for the most part, (1) small changes from January to February and (2) significantly weaker levels in January compared to December plus (3) declines by all components over three months coupled with (4) very small changes over six months, and for the most part, (5) most small declines over 12 months. These generalities are the ‘rule' up and down the line of this survey. The main exception to these rules is that over 12 months there's a more significant weakening for eating & drinking places and that industry depends upon improved conditions on the virus front in order it to be back on its feet.

Current component levels All the queue standing components of the current index are below the 50-percentile level. That's significant because the 50th percentile on the queue standing represents the location of the median for each series. So that each series is performing at a below median level of performance. The best performing of these components on a relative basis is the employment reading which is at its 45.6 percentile standing: the next best after that it's for manufacturing establishments at the 31st percentile standing. The worst performing component, eating & drinking places, had its 4.2% standing followed by services overall at a 9.6% standing. Pretty clearly Japan's economy's struggle is broad-based. Fortunately, employment is the least affected among the components surveyed in the table. The employment reading is below its median, but not by much and its relative strength (compared to other readings) provides stability for the economy because employment supports wages and income creation and thereby spending.

The future index The economy watches future index moved up slightly to 44.4 in February from 42.5 in January; these two readings are somewhat below their December level of 50.3. The future index improved slightly month-to-month and January while the January-February pair are weaker than December by 6-8 points. That is significant, but it is much less that the 20-point drop off for the current index. The future index also shows three month declines across all its components as did they current index. Over six months the future index is mixed but little changed. The future index, like the current index, is moderately lower over 12 months. The percentile standing of the future index is at the 28th percentile overall; across components it ranges from a low of the 20th percentile for nonmanufacturing firms to a high of 34.7 percentile for employment assessments. Like the current index, the relatively strongest reading is for employment in the future index. However, the percentile standing is lower in the future index.

German new factory orders rose 1.8% in January after rising by 3% in December and by 3.6% in November. Orders are up at a 39.2% annual rate over three months; that's a sharp acceleration from the minus 9.2% rate of change over six months and a solid acceleration from the 7.4% annual rate over 12 months.

Foreign orders rose by 9.4% in January after falling 2.4% in December and rising 6.5% in November. Foreign orders are rising at a very strong 67% annualized rate over three months after falling at a 3.2% annual rate over six months and rising by 9.4% over 12 months. Domestic orders fell by 8.3% in January, blunting the increase in overall order gains. Domestic orders rose by 11.4% in December and fell by 0.7% in November. Over three months domestic orders are rising at a 6.1% annual rate, up from a minus 17.5% rate over six months compared to their 4.6% increase over 12 months. Domestic orders have been more volatile and weaker than foreign orders.

Clearly German orders are being driven by their foreign component. This is not surprising since foreign orders have increasingly more important than domestic orders going back to at least 1990. Germany is highly trade-dependent, and its manufacturing sector continues to show that. Germany is highly exposed to international events although a lot of German trade occurs within Europe and within the EMU single currency area without clear foreign exchange consequences.

Overall orders: Quarter-to-date and Covid-to-date In the quarter-to-date, total orders are rising at a 34% annual rate boosted by a 75.7% annual rate increase in foreign orders; domestic orders are falling at a 10.2% annual rate early in Q1 2022. Looking at orders back to January 2020 when COVID first struck, total orders are up by 8.8% on that timeline, foreign orders are up by 11% and domestic orders are up by 5.5%. These are reasonably firm results for real orders over a two-year period.

Real sales trends Real sales in Germany show more of a mixed trend across its component sectors. For manufacturing monthly sales are up by 1.8% in January; that accelerates from 0.7% in December and compares to a 4.3% rise in November. However, consumer goods, consumer durable goods and consumer nondurable goods sales all decelerate month-to-month. Intermediate goods sales decelerate month-to-month as well. But those trends are dominated by capital goods that accelerate and grow 3.9% month-to-month in January, after being flat in December and surging by 8.3% in November alone.

For the moment, capital goods are extremely strong and making up for some lost time. Manufacturing sales are also accelerating; they are accelerating to a 30.4% annual rate over three months from 8.3% over six months and 3% over 12 months. The manufacturing sector is gaining momentum.

By sector, consumer goods output is less linear with a 3.2% gain over 12 months turning to a decline of 0.8% at an annual rate over six months but then climbing back in the plus column with a 5.3% annual rate gain over three months. Intermediate goods accelerate steadily, rising from a 0.3% gain over 12 months, to a 1.2% pace over six months and to a pace of 8.1% over three months. Capital goods show the strongest acceleration of all; real capital goods sales are up by 3.1% over 12 months rising to a 14.8% pace of expansion over six months. That increases to 60.2% at an annual rate over three months. Clearly capital goods are driving force in the German economy right now.

Quarter-to-date and Covid-to-date Quarter-to-date real sales show strength for manufacturing where sales are up at a 24.1% pace; consumer goods are up at 3% pace; intermediate goods are up to 2.2% pace; capital goods sales are rising in the quarter-to-date at a massive 46.8% annual rate. Some of this clearly is ‘catch-up’ as sales have been weak since COVID struck. Looking at the change in sales since January 2020, total manufacturing sales are still somewhat weaker being 0.2%, below their January 2020 mark. Consumer goods real sales are 2.4% lower; intermediate goods sales are higher by 0.9% but sales of capital goods are lower by 0.7%. So, the manufacturing sector is just now beginning to gather momentum and post some pace.

Caveat outlook This, of course, is time for us again to deal with suspicions about the future. After having to make caveats over the last two years about COVID and its effect on manufacturing in the economy, on orders and on trade, there is now a war going on in Ukraine. There are huge potential consequences for Germany and for Europe because of the dependence of this area on oil from Russia. There is an ongoing dialogue about whether Russian oil will be embargoed or not. This raises a huge question mark about Germany and its potential for growth looking ahead.

So far, we have good strength in the countries that we summarize in the table: Germany, France, Italy, and Spain. Industrial measures stand in their respective 90th percentile ranking them in a data queue since 1990. Obviously, the future is clouded because of war in the Ukraine and because of European dependence on oil. For now, momentum looks good. Sector performance is solid. There are still ongoing supply-chain problems, but for now, these forces do not seem to be restraining Germany very much. However, the war in Ukraine is a new element that must be put in the uncertainty column looking ahead and it could become a huge fact and will likely restrain growth ahead.