Economy in Brief

Italian industrial production in manufacturing fell by 3.4% in January following a 1.1% decline in December and a 1.5% gain in November. This series for manufacturing industrial production declines at 11.6% annual rate over three months, at an 8.3% annual rate over six months, and at a 2.4% annual rate over 12 months. Italian industrial production is sequentially decelerating: the more recent, shorter-period growth rates are weaker than the longer growth rates indicating progressive deterioration in Italy's manufacturing sector momentum. The current observation is for January 2022; with one month into the new quarter, industrial production is falling at a 20% annual rate early in 2022 Q1.

Sector trends Declines in January permeate the index; there's a 3.6% decline in consumer goods output, a 1.6% decline in capital goods output, and a 3.4% decline in the output of intermediate goods. In December, the weakness is widespread again this time with consumer goods output flat and with a 2.2% decline in capital goods and a 0.6% decline in intermediate goods. In November, conditions are slightly more mixed, but more upbeat, with consumer goods output down by just 0.2%, capital goods output up by 2%, and intermediate goods output up by 0.7%.

However, looking at the table, there are still sequentially deteriorating rates of growth for consumer goods and for intermediate goods in which the shorter, newer growth rates continue to show weaker and weaker results. The exception is for capital goods but it's not much of an exception because for capital goods there is a 12-month decline of 2.8%, over six months a decline at a 7.7% annual rate over emerges, and over three months that is only slightly improved to -7.1% - but that's still a severe downturn. It's still a rate of decline that's much greater than the 12-month rate.

Quarter to date Consumer goods are declining at a 20.2% annual rate in the quarter to date. Capital goods output is declining at a 13.5% annual rate in the quarter to date while intermediate goods are declining at 19.7% annual rate. Obviously, the quarter-to-date data show severe and consistent weakness across sectors; there really isn't any exception and there isn't a strong sector.

Transportation There are separate figures for the transportation industry, and there is some strength there. Transportation shows gains month-to-month in January, December and November. Transportation output is accelerating with the -1.3% change over 12 months, a 1% annual rate gain over six months and a huge 26.5% annual rate gain over three months. However, even with this sector embedded in the totals, manufacturing continues to decline into show sequential weakness.

Other industrial measures The manufacturing PMI declined by 5.9% in January; it declined by 1.3% in December but did make a 2.8% increase in November. However, there is sequential deterioration as the manufacturing PMI goes from a gain of 5.7% over 12 months to a declining pace of 6.5% over six months and the declining pace accelerates to 17.1% annualized over three months. The PMI reinforces news from the headline showing weak output and progressively weakening output. The EU Commission statistics on industrial confidence for Italy are contrary to this; they show a 12-month level of confidence at 6, over six months they show average confidence higher at 9.2, and the three-month average is at 9.9. All of these are averages so according to the EU data industrial confidence in Italy has been progressively improving. However, industrial output percentage changes in totals as well as by sector, show the opposite: progressive deterioration. Also, the Italian manufacturing PMI from Markit shows progressive deterioration. The EU confidence measure must be picking up abstract optimism not on-the-ground reality.

And there is inflation... On the same timeline, there's, of course, rampant inflation and it is rising because of supply problems because of high oil prices and for Italy we see a 13% annual rate over 12 months, we see another 13% annual rate over six months and that climbs to a 14.6% annual rate over three months. Italian inflation shows a slight tendency to accelerate; it clearly is stuck at a very high level. In the quarter to date, it's up to a 17.5% annualized pace. Inflation continues to be a problem in the industrial sector for Italy as it is in much of the rest of the world.

The current IFO gauge in March fell sharply from a value of 15.5 in February to -6.3 in March. The manufacturing sector fell from a reading of 23.1 to -3.3. Construction fell from a reading of 8 to a reading of -12.2. Wholesaling fell from 14.3 to -6 6. Retailing fell from a February mark of -3.4 to -19.0 in March. The service sector reading of 13.6 in February diminished to 0.7 in March. It's the only positive net reading for climate in the IFO in March. As a whole, the business situation in the current environment erodes from 24.8 in February to 21.1 in March while expectations plummet from 6.3 in February to -21.7 in March. These are dramatic declines in the assessment of climate and expectations in the March IFO report.

Rankings We further evaluate the climate assessments by looking at the rankings of these sectors: the all-sector index has a ranking since 1991 in its 35th percentile, meaning it's been weaker only 35% of the time. Manufacturing is in its 27.7 percentile, wholesaling is in its 45th percentile, and retailing is in its 32nd percentile. Services, despite being the only positive net reading, is at the lowest standing of the bunch at a 9.5 percentile reading. Construction, despite its climate reading of -12.2, has a 60.1 percentile standing. That means based on all the construction metrics back to 1991 construction is lower 60% of the time and higher 40% of the time; it is the only sector above its historic median on this timeline.

Ranking of one-month changes The ranking of month-to month changes back to 1996 shows the largest one-month change and decline in manufacturing on record. Construction, wholesaling, and services have weakened by more month-to-month less than 1% of the time on that timeline. Retailing has weakened by more only 1.2% of the time. These are draconian changes month-to-month. It is stunning that markets have not reacted by more than they have with these kinds of erosions in the fundamentals.

Current conditions vs. expectations show stark difference There's a stark difference between the readings for current conditions and expectations this month. It noted above that the all-sector current index fell to 21.1 in March from 24.8 in February, while expectations in March plunged to -21.7 from 6.3. In February current conditions have not been that adversely affected at this point by the war in Ukraine, the sanctions, the recirculating virus, and other generalized economic circumstances in the German economy. However, expectations have been vastly downgraded. We see this by looking at standings of the two metrics: for current conditions, a 36.2% standing prevails which leaves the reading weak, in the lower one-third of its range; however, expectations have a 4.8-percentile standing. The components of expectations are even weaker than the 5% overall expectations standing. Each of the components of expectations in the IFO framework has a rank standing below the 4.8-percentile mark. The weakest being construction at 0.3%, the second weakest is wholesaling, followed by retailing at 2.3%, and then manufacturing at 2.4%. Looking at the individual standings for current conditions, services clearly is driving down the overall rank for the sector. Services has a 22.1 percentile standing. All the other industries: wholesaling, retailing, and manufacturing boast respective standings that are well above their 50th percentile mark (60th, 70th and 80th percentiles, in fact) indicating that they're above their medians for the period (reminder: median occurs at a ranking of 50%). Yet, the sector median stands in the 36th percentile dragged down exclusively by services weakness.

Position since before Covid struck is broadly weaker The far-right column chronicles change in the various line items compared to their levels in January 2020, before the virus struck. All the climate readings show declines compared to that date. Under current conditions, only manufacturing and wholesaling show increases. Among expectations all sectors are weaker and all of them are weaker in double digits.