Economy in Brief: November 2023

Euro-Area IP is falling in September. The declines are broad across industry groups and across EMU member countries. Industrial output has been volatile among the four largest economies in EMU as well. Despite the clear broad weakness in industrial production the sequential growth rates are not progressively deteriorating. Growth for headline production as well As for manufacturing show contractions over 12-months, over six-months, and over 3-months and the contractions over 3-months are greater than they are over 12-months. But there's a slight revival with less weakness over 6-months compared to 12-months preventing a clear path to deterioration from emerging.

Manufacturing sectors - Looking at sectors in manufacturing consumer durables output fell 8% over 12-months, at 15% annual rate over 6-months and fell at a 10% annual rate over 3-months. Consumer nondurables contracted by 6.8% at an annual rate over 12-months at 10% pace over 6-months and at a 3.5% annual rate over 3-months. Intermediate goods output shows lessening deterioration, as a 4.7% decline over 12-months is reduced to 3.4% over 6-months and is educed to a -2% pace over 3-months. Capital goods output falls by 7.6% over 12-months rises at a strong 23% annual rate over 6-months then plunges at a 9.8% annual rate over 3-months. These are complex patterns. Only capital goods mount any increase in output over any of the horizons, then that rise is reversed. However, there's no persistent deceleration, just scattered ongoing declines that seem to change pace randomly. The chart that plots only year-over-year trends paints a darker picture.

Quarter-to-date - Quarter to date statistics show headline production excluding construction falling 6.5% at an annual rate in the third quarter, manufacturing output falls at an 11.1% annual rate, drop is led by a decline of 11.9% in durable goods output an 8.8% drop in consumer nondurable goods production, with the immediate goods output falling at a 2.6% annual rate and capital goods output declining at a 3.5% annual rate.

Output by sector - All the output comparisons by sector show mixed results when we compare the current level of activity to that prevailing in January 2020 before COVID struck. Consumer nondurables output is stronger, capital goods output is stronger, but consumer durables output is weaker, and intermediate goods output is weaker. If we rank the sectors by their growth rates back to 2006 current performance is weak for all the sectors total and industrial production growth has an 8.3% ranking, manufacturing output growth has an 8.8% ranking, consumer durables growth has an 8.8% ranking, consumer nondurables have a 1% ranking and intermediate goods have a 16.6% ranking; capital goods growth has a 10.2-percentile ranking. The growth performance for this past year is quite weak compared with historic norms and you can see what those growth rates are on the table and see by judging the progressive pace of growth conditions haven't improved very much over 6-months or over 3-months.

The output statistics for countries is similarly weak the reporting remove member countries showing output declining in September except Italy that manages a 0.1% increase in Malta a tiny economy that manages a 1% gain. In August six countries logged output gains month to month well in July output gained in most countries with only six of thirteen showing output declines.

Industrial growth across countries - Sequential growth rates show that weakness has been pervasive. Over 3-months for example only three countries in the monetary union show industrial output increases, over 6-months only two had increases and over 12-months only two show increases. These metrics reveal the broad nature of weakness in the industrial sector within EMU. Similarly with the third quarter data complete there are only two countries with quarter to date increases in output those are Finland with a 5% increase and Malta with a 4.8% increase.

Growth rankings - The rankings for the growth performance of countries over the past year compared with their historic standards show every country below its median result except for tiny Malta that has a standing of 51.2%, just a nudge ahead of its historic median that occurs at a ranking of 50%. Greece, another small economy, manages a ranking of its growth rate that is up 2.1% to a 70.7 percentile standing well above its median. In part, that also underscores how little output increased in Greece that a 2% growth rate could have a 70-percentile standing. Ireland is having its worst performance of the entire period, its a year in which output has fallen by 27%. The median percentile ranking among monetary union members is a ranking of 16.1% the average ranking is a ranking at 22.1% both of these show extreme weakness across the Euro Area in the industrial sector.

There is little in the way of good news in this industrial production report for September. The headline weakness is clear and the weakness spreads across countries and there's little in the report that suggests that this period of weakness is letting up in any way. However, we're at a time where there has been some growing optimism about the US economy gaining its footing and show some inflation progress that an increasing number of market participants are evaluating as evidence that the Fed is done raising interest rates. If that's true, given the size and the importance of the US economy, there could be better news for Europe ahead.

Zew metrics showed a weaker economic situation in the Euro-Area this month while Germany strengthened and the US weakened, a mixed picture across these regions. Economic expectations show a stronger Germany and a weaker US performance expected.

Inflation expectations showed stronger inflation expected in Germany and the Euro-Area. Weaker inflation is expected in the US. Short term rate expectations were weaker in the Euro-Area and weaker in the US as inflation has been coming in and showing signs of behaving. Long term rate expectations fell in both Germany and in the US. Stock expectations month-to-month improved in the Euro-Area in Germany and in the US.

Economic conditions continue to show rankings well below the 50% mark for the economic situation for Germany for the Euro-Area and for the US. Economic expectations are also well below the 50% level which would mark a neutral reading. Inflation expectations, however, are uniformly low as investors expect inflation to decline from its high level and so the expectations metrics have extremely low percentile standings. Short-term rate expectations are also low because investors basically assume that central banks have pretty much got interest rates where they want them and they look for any further rate changes to be more or less window dressing. This explains why long-term interest rates have exceedingly low percentile standings. Long rate expectations for Germany are at 4.4%, in the US they are at 0.3%. There are few expectations that rates are going rise at this point. And with that expectations have shifted to the stock market where the expectations are closer to or above the 50% mark and investors are beginning to think equities again for better or for worse. Things change...