Economy in Brief: October 2022

Japan's industrial output surged in August with manufacturing output rising by 3.5% month-to-month after rising 0.8% month-to-month in July and rising 9.1% month-to-month in June. The three-month growth rate is off the charts at 68% annual rate. That compares to an annualized growth rate of 8.3% over six months and of 4.3% over 12 months. Clearly there is some catch-up going on with industrial production. Japan is planning stimulus programs for its economy.

Surveys show some mixed progress, but lag the strength in the IP report Survey data for August failed to show the same kind of enthusiasm as the industrial production report, which showed an upward revision in today’s release. The economy watchers index, a diffusion index report, rises to 45.5 in August from 43.8 in July with its future index rising to 49.4 in August from 42.8.

Sector indexes from Teikoku, another diffusion report, show manufacturing slipping to a diffusion reading of 41.0 in August from 41.3 in July; retailing steps up to 36.3 from 35.7; wholesaling slips slightly to 39.2 from 39.5; services move higher to 45.4 from 44.4. The construction sector is better by just a few ticks at 43.3 in August compared to 43.1 in July.

The METI indexes for industry and services both showed monthly gains.

Growth vs. activity levels Evaluating the economy watchers and on the Teikoku indexes by their growth rates, we'll find more strength in the economy watchers survey.

The economy watchers indexes show rankings based upon year-over-year growth in the 90th percentile for the headline index, for the retail sector, for eating & drinking places, and for the service sector readings. However, if we evaluate those same sectors based on the levels of the indexes, since these are diffusion indexes, we get a view of the level of performance rather than an assessment of growth. The economy watchers index has a 33.6 percentile standing for its level, below its historic median; the retail sector has a 40.6 percentile standing; eating & drinking places have a 15.4 percentile standing; the services sector has a 25.9 percentile standing. Viewing employment overall, employment increased to a diffusion reading of 52.5 in August from 50.7 in July, with the growth ranking in its 73.4 percentile but with an index standing that is much weaker, in its 42.7 percentile. Pitting the growth rankings against the index level rankings, it's quite clear that Japan is still relatively weak in terms of performance, and this is what the index level ranking tells us. However, the growth ranking tells us that there has been a spurt which has not yet elevated growth to a strong position but there has been a spurt that has boosted the economy short term.

The Teikoku indexes show somewhat the same phenomenon with the growth rankings generally above the diffusion index level rankings. The manufacturing sector is an exception with a growth ranking at its 42nd percentile and an index level ranking nearly the same at the 43rd percentile. But retailing has a 74.1 percentile growth ranking compared with 37.1 percentile level ranking; wholesaling has a 60.8 percentile growth ranking compared to a 44.1 percentile index ranking; services have an 80.4 percentile ranking on growth compared to a 39.9 ranking on its index level.

Separately, the METI indexes shown improvement for industry on the month and an improvement for the tertiary (or services) sector month-to-month. The growth rankings of these two sectors put industry in the 88th percentile and the tertiary index growth rank in its 95.7 percentile. However, the levels of these surveys show index rankings in the 52nd percentile for industry and in the 39th percentile for services, both significant step backs.

Orders Japan orders failed to confirm the near-term strength in growth as in August total orders, core orders and foreign orders all fall sharply with only domestic orders moving up by 1.9% month-to-month. The growth ranking for orders reverses the earlier trends. The total growth ranking on year-over-year growth is 34.7%; however, the level of the index is at its 90.9 percentile. Core orders have a 66.9 percentile ranking on growth, compared to a 91.6 percentile on levels. However, the orders data aren't comparable to the other data in the table since orders are an ordinary accounting time series that adds up the value of orders; orders are not a diffusion index. The other series are diffusion indexes that measure output breadth. Over time we naturally expect an orders series based upon ordinary data to grow and therefore the level index will tend to grow even if it's growing insufficiently. Diffusion industry indexes don't have that same property.

The trade deficit in the European monetary area fell to 47.3 billion euros in August from a 40.5 billion deficit in July. The surplus balance on manufacturing trade is reduced to €16.1 billion in August from €16.6 billion in July. Most of the deterioration in the trade balance came in nonmanufacturing trade, as the August balance on that account widened to €63.4 billion from €57 billion euros in July.

The European Monetary Union trade balance has been slipping at a very rapid rate. The 12-month average is -19.7 billion euros, over six months that expands to -€33.9 billion and over three months it's at -€40.3 billion. The three-month average is twice the 12-month average. The surplus balance on trade in manufacturing has slipped steadily but more modestly from a €22.3 billion surplus over 12 months to an €18.8 billion surplus over six months and then to a €17.2 billion surplus over three months. These are period averages of the surpluses. On the same timeline, the nonmanufacturing balances have gone from a €42 billion deficit over 12 months to a 52.7 billion deficit over six months to a €57.5 billion deficit over three months. Over the broader sequential period, just as over the last several months, the deterioration is mostly in nonmanufacturing trade pointing the finger at commodities and the increase in commodity prices and particularly the price of energy goods internationally.

Not surprisingly, this trend is built on a weakening trend in exports and a withering trend in imports as well, but with export growth rates much lower than import growth rates throughout. Export growth rates transition from a 21% annual rate over 12 months 2 a 19% annual rate over six months, to a 6% annual rate over three months. For imports, there's a 51% annual rate over 12 months that stabilizes at about 52% over six months and then slides to a 36% annual rate over three months. In both cases, the growth rates for exports and imports are declining; however, the import growth rates simply swamp and dwarf the growth rates for exports.

We can look at these growth rates separately for manufacturing and for nonmanufacturing trade and while the numbers are different the trends are not particularly different.

For manufacturing trade, export growth slows from 18% over 12 months to 10.5% over six months to 7% over three months. For imports, manufacturing growth rates log 29% over 12 months, 29% over six months and 15% over three months.

For nonmanufacturing trade, export growth rates log 37% over 12 months, 64% over six months and then drop sharply to 3.7% over three months. For imports, the 12-month growth rate is 110%, the six-month growth rate is 105%, and over three months that pace steps back to a growth rate of 81%. Nonmanufacturing trade is clearly seeing nominal flows expand much faster than manufacturing trade. The action is really on the import side where the growth rates are typically twice or more the growth rates on the export side for nonmanufacturing goods. It's clear from these statistics that inflation is what's really driving the deterioration of this trade account of the European Monetary Area.

Separate country level statistics for Germany and France tell the same story although with less of a gap between the export and import growth rates themselves. For Germany, exports expand at a 14% pace over 12 months, at a 21% pace over six months and fall back to a 15.5% pace over three months. For imports the growth rate is 29% over 12 months, 33.5% over six months and that over three months imports fall very sharply and leave their growth rate below that for exports at a 6.4% annual rate. For France, exports grow at a 20.9% annual rate over 12 months, at a 6.1% rate over six months and at a 15.3% rate over three months. For imports, the 12-month growth rate is 30.9%, over the six months the growth rate is 25.1%, and the three-month growth rate at 19.5% is only a few percentage points above the growth rate for exports.

Other European growth rates focus on exports. In the table, we have growth rates for Finland, Portugal, and Belgium. These export growth rates generally fall from about 30% over 12 months, down to a pace about 25% over six months. And then over three months, in Finland export growth declines at a 7.1% annual rate, in Portugal exports decline at a 16.1% annual rate and then Belgian exports expand at a 3.2% annual rate over three months. Export growth clearly slows in all three of these countries- exports decline over three months in two of them. We see evidence in these flows of weakening demand globally against the earlier EMU, French and German evidence of still strong nominal import demands.

For the U.K., a different picture emerges, with exports having a 27% growth rate over 12 months, a 58% growth rate over six months and a 24% growth rate over three months. U.K. imports grow at a 29% pace over 12 months, faster than exports, but then slip sharply with 10.7% annual rate over six months and then slip again for 1.1% growth rate over three months. These figures reflect the slowdown in the U.K. economy and the onset of recession. There is going to continue to be slowdown for demand in the U.K. market. There's also a sharp weakness in the pound sterling on the foreign exchange markets that will affect U.K. trade flows in the near term. However, with the possibility of a J curve effect operating in the short term, we might not see that in the next few months data, immediately, but further U.K. trade improvement should play out over the next six to 12 months.