Economy in Brief: 2022

The amplitude adjusted OECD leading economic indicators in May continue to show weak conditions. The overall OECD index declined in May month-to-month. The index for the top seven OECD countries declined, the index for the euro area declined, the index for Japan was unchanged and the index for the United States was unchanged.

The OECD prefers to look at its leading economic index signals in terms of six-month changes. Viewed in that way, the OECD overall index is down by 0.5%, the index for the seven largest OECD countries is down by 0.5%, the index for the euro area is down by 0.7%, the index for Japan is flat, and the index for the U.S. is down by 0.4%. Over six months the index for China is down by 0.8%. Those figures are for six-month averages; to the right of them, in the table, we see changes over six months calculated on point-to-point data and those changes also show broad weakness and weakness that has been in train over the past 12 months (two nonoverlapping weak six-month modules in the table back-to-back).

The indicators show that growth broadly is below its steady state pace in most of the aggregate presentations. The levels of the normalized amplitude adjusted leading indicators in the bottom panel of the table, reveal readings below 100; for the month of May they indicate weakness for every country or region except for Japan and Germany; Japan and Germany are also exceptions in April. Much of this weakness came on in April since in March these same indicators show slowing tendencies in only 5 of the 12 entries in the table. However, those slowdowns were for important economic areas as they included the U.S. and China. China's 'Covid zero' policy has been a drag on global growth and has been particularly hard on Asian economies.

The queue percentile standings for six-month growth show ranked values below 50% which means below the median for five of six entries in the table with Japan being the exception. Looking at a broader array of countries and areas and applying the queue percentile standings to the levels of the indicators instead of the six-month changes, there are only three with readings above 50% indicating values that are above their historic medians. Those three countries are Japan with a standing at its 77th percentile, Germany with a standing at its 77th percentile, and France with a standing at its 50th percentile. A few countries have standings in the lower quartile of their range; that includes China and Greece as the U.K. barely escapes that designation. The European Monetary Union has a standing in the bottom one-third of its historic queue of values.

The OECD indicators are clearly indicating that there is a great deal of moderate weakness and subpar growth in train across these economies. Only a few developed economies are experiencing more extreme weakness such as China where it's Covid-zero policy is responsible for curtailing growth.

Italian manufacturing industrial production rose by 1.5% in April on a strong gain in the intermediate sector of 2% and a solid gain in the consumer sector of 1.6% while capital goods output remained flat month-to-month. Over the last three months among these three sectors, there was only one month in which a sector’s output declined - that was a 0.6% decline in intermediate goods output in March.

Recent strength meets longer lasting breadth This strength is part of an ongoing process in Italy where 12-month output is up by 3.7%, six-month output is up at a 6.2% annual rate, and three-month output is up at a very strong 25.5% annual rate. Industrial output in Italy is accelerating across these horizons and what's more it is accelerating in each of its major sectors: consumer goods, capital goods, and intermediate goods.

Strength in growth no matter how you cut it Over 12 months the strongest sector is consumer goods on a gain of 9.7% with capital goods the weakest on a gain of just 0.5%. Skipping ahead to three-months, the strongest sector is consumer goods on a gain of 38.1% at an annual rate, followed by intermediate goods at a 21.6% annual rate followed by capital goods at 13.6%. These trends show that Italian output has been strong in the current month, in the last few months, and has been accelerating over the last year across all three major industrial sectors. This is a very strong showing.

Adequate to very strong standings If we rank the industrial sectors based on year-over-year growth rates, Italian performance ranges between adequate to strong. At 3.7%, manufacturing output year-over-year has an 80th percentile ranking on data back to 2000. That's a top 20% position, which is strong. Consumer goods output, running at 9.7% over 12 months, has a 97.7 percentile standing and that is excellent and extremely strong. Intermediate goods output, with a 2.0% increase over 12 months, has a 66.7 percentile standing; that's a top one-third ranking for the sector and that is a solid performance. However, capital goods show an increase of just 0.5% over 12 months; that performance has a ranking of 48.9% which puts it just about one-percentile point below its median on this timeline. Growth at the median is adequate but no more than that. So, when we evaluate the growth rates for Italian production across sectors, the bottom line is that growth by sector ranges between adequate to quite strong.

Great results but are they sustainable? The second part to the story about ranking is that, of course, the three-month growth rates are going to rank a lot higher. And so will the six-month growth rates. Italian industrial production looks very-solid over 12 months and then, because of the increasing growth rates, it's looking stronger and stronger over these shorter periods. The question is whether Italy will be able to sustain this kind of increase in output given the challenges in Europe.

Other metrics are not so glowing... Manufacturing PMI: The Italian manufacturing PMI (S&P Global) has been slipping during this period. It has declined from a 12-month average of 59.8 over 12 months to average 58.6 over six months to a 56.2 average over three months. The index has further slipped from February to March to April although the April level for the manufacturing PMI is still a solid 54.5 reading. What we see in looking at the PMI data is that the trends are opposite to those that we get from looking at the performance of industrial production outright. And that could be something to bear in mind when considering trend and future performance.

EU and Istat surveys: Other indicators for Italy like the EU industrial confidence index, current orders from Istat and the Istat outlook for production also are less upbeat. These surveys show withering responses from 12-months to six-months to three-months but fail to do so sequentially – they do so only indicatively. However, the levels of the indexes generally are still strong: the rank standing of the EU industrial confidence index is strong at its 87.5 percentile. The Istat current orders reading has a strong 95.1 percentile standing. However, the outlook for production from Istat has only a 30.4 percentile standing, a standing that has been weaker only about 30% of the time. That is worrisome.