Economy in Brief: December 2022

Real industrial orders in Germany rose 0.8% in October, led by a 2.5% rise in foreign orders. Domestic orders fell by 1.9% in October. While unexpected, this gain in orders can't be considered a surprise. The 0.8% order increase comes after a 2.9% fall in September and a 2% fall in August; the 2.5% gain in foreign orders in October follows a 5.2% drop in September and a 1.7% monthly drop in August. Domestic orders had risen by 0.5% in September but also fell by 2.6% month-to-month in August.

Sequential growth rates out the truth As is usually the case, the sequential growth rates tell a clearer story about what is really going on with the trends in orders. One year ago, the year-over-year change in orders was a gain of 0.4%. This year the 12-month gain from that base is a decline of 3.1%, over six months it's a decline at a 6.5% annual rate, and over three months it's a decline at a 15.7% annual rate. Overall orders are decelerating and decelerating steadily on these time horizons. Foreign orders one year ago fell 0.7% over 12 months; this year the 12-month change in foreign orders is a fall of 0.4%, a fall at a 0.2% annual rate of decline over six months- only slightly smaller – and a drop at a 16.4% annual rate over three months. Clearly, another very weak growth rate profile. Domestic orders a year ago rose 2.1% year-over-year but over 12 months domestic orders are falling by 7.1%; over six months they're falling at a 14.9% annual rate; over three months they're falling at a 14.9% annual rate. Domestic orders clearly are weak and are not reviving as the monthly gain might otherwise suggest.

Quarter-to-date (QTD) The quarter-to-date calculations show trends with total orders falling at a 10.9% annual rate, one-month into the fourth quarter with foreign orders falling at a 9.4% annual rate and domestic orders falling at a 13.6% annual rate. These are sharp declines for annualized growth rates adjusted for inflation. Orders have not been strong in Germany for a while. Calculating growth in orders form just before COVID started, in January 2020, total orders are now 2.1% lower from that mark while foreign orders are 2.2% lower and domestic orders are 2.1% lower. These metrics reveal similar weakness across domestic and foreign entities.

Real sales by sector Real sales by sector show better life than orders, but orders are the leading series and sales are the trailing series…. As an overview, total real sector sales are rising at a 2.2% annual rate in the quarter-to-date with manufacturing sales rising at a 2.8% annual rate. Sales are being held back mostly by an 18.1% annual rate decline in consumer durables that has total consumer sales down by 1% at an annual rate in the quarter-to-date. In addition, intermediate goods sales are falling at a 10.8% annual rate QTD. Rising in the quarter-to-date are capital goods sales, up at a 15.3% annual rate and consumer nondurable goods sales rising by 3.1% at an annual rate.

Growth profiles for real sector sales are erratic weakening However, the details on real sector sales show widespread declines over the last two months; sales in six of the seven categories fall month-to-month in October and sales fall in five of seven categories in September. Sequentially real sales data grow by 5.5% over 12 months, accelerate to a 10.7% pace over six months, then decelerate back to a 5.3% annual rate over three months. That is fairly encouraging and stable. Consumer goods sales fall 0.6% year-over-year and fall at a 6.3% annual rate over six months, but then recovered to gain at a 7.1% annual rate over three months, complicating the picture. Still, this is against the weight of consumer durable goods where's sales rise by 1.6% over 12 months, fall at a 7.7% annual rate over six months, and then fall at a faster 8.3% annual rate over three months. Intermediate goods also show sequential deterioration and deceleration with a 1.4% decline over 12 months, a 3.1% decline over six months, and a 6.1% decline over three months. Capital goods show a great deal more strength, up by 15.1% over 12 months and up at a 33.4% annual rate over six months but then cool back to a still very strong 15.9% annual rate over three months. Consumer nondurable goods sales fall by 1% over 12 months and fall at a faster 6% annual rate over six months but then recover at a 10.3% annual rate over three months. The capital goods sector is the only exception and the only source of real strength in sales.

The trends in real sales by sector are a lot more confusing than orders. The quarter-to-date data suggests that the consumer sector and intermediate goods sector are still dragging things down while consumer nondurable goods by themselves are showing moderate growth against capital goods that are growing strongly – for however long that can last in the face of weakness elsewhere.

EMU's 'Big Four' Economies In the bottom panel of the table, the EU industrial confidence measures are presented for Germany, France, Italy, and Spain to compare German trends to the next three largest economies in the European Monetary Union. Germany has a positive reading of plus three in October compared to France at -6.7, Italy at -4.1, and Spain at -4.0. However, looking at the sequential averages of these EU diffusion readings, we see that each of these four countries shows its six-month gauge weakens compared to the 12-month gauge and the three-month gauge weakens compared to the six-month gauge. There is clear weakening going on across the European Monetary Union's largest economies. However, the queue standings that evaluate the levels of the October readings compared to recent history (in this case taken back to 1990) shows more strength than you might expect. The German reading has a 78-percentile standing which is quite firm. Spain has a reading at its 54.5 percentile which is above its historic median. France, at its 48.9 percentile standing, is only slightly below its historic median. Italy at 42.4 percentile standing is below its historic median and weak but far from collapsing.

Growth since COVID after the bust/boom cycle has been weak Evaluated from their level in January 2020 before COVID struck, the German industrial confidence measure is the relative strongest in this group, having risen 13.6 points from that mark; Spain has risen by 5.4 points, Italy has risen by 0.9 points, France has a net lower reading, falling by 3.8 points from its level on January 2020.

S&P composite PMIs for November worsened generally across the reporting global community. Among the 23 reporters in the table, we see in November 15 of them have PMI gauges below 50 indicating a contraction in the overall economy (since these are composite indexes) while 12 of 23 indicate that there is a slowdown in progress. Ten of the 15 PMIs below 50 are also slowing.

The November metrics are generally slightly worse than those from October and September indicating that there is some ongoing slippage occurring. In addition, if we look at the averages from 3-, 6-, and 12-months, we see the number of jurisdictions with readings below 50 swells in number from 4 to 7 to 13 while the number that are showing slowing activity rises from 3 to 16 to 18. There clearly is a broadening of the weakening and that is worrisome.

We also see a great deal of weakness among the largest market economies at the top of the table over the last three months. Looking at the United States, the European Monetary Union, Germany, France, Italy, and Spain as separate entities, these are six observations over three months giving us 18 observations and yet among those 18 only 6 of the observations showed month-to-month improvements. Looking at the same group of countries over three months, six months and 12 months, all of them are worsening on all of those horizons.

Looking a little bit more deeply at the queue standings that rank each one of these observations and their recent approximately 4 1/2 years of queue of data, we find that for the U.S., for the European Monetary Union, Germany, France, Italy, and Spain all of them have queue standings below the 25th percentile, most of them below their 20th percentile. These are all extremely weak readings.

The extent and degree of weakness The queue versus percentile standings generally shows very different results. The percentile standings position each observation in its high-low range as a percentile position for the period while the queue metric positions each observation relative to all the observations. When you look at the queue standing, you see where this observation stands in percentile terms versus all the observations that have been registered during the last 4 1/2 years. The queue gauge only gives us the relative position proportionally versus all the other observations. The percentile gauge, in contrast, uses only three observations. The difference is that the percentile numbers show us that there is very little abject weakness in the November readings. Placing each November observation between its respective highs and their lows leaves most of them above their 50th percentile that is above their mid-range observation. Only Qatar at a 39.5 percentile standing, Sweden with a 44.1 percentile spending and the U.S. with a 46.4 percentile standing are below their respective historic medians. The weak queue standings tell us that the preponderance of readings over this period have been stronger, but the relatively firm percentile standings tell us that current levels of the variables do not threaten the sort of lows we see during periods of extreme weakness such as during Covid since those readings fall in this period comparison and mark out of the lows.

Current standings: As an example, the average unweighted U.S., U.K., European Monetary Union, Japan composite PMI is at 47.8 in November; that's down from 48.8 in October and from 49.4 in September. This is clearly slipping weakness, and these are observations below 50 indicating contraction, at least in the lexicon of the PMI data; however, these are not exceptionally weak readings. The median for the entire sample of countries is at 48.9 in November, down from 49.4 in October and from 50.9 in September. There is sliding weakness considering the entire sample. And as we saw, the number of jurisdictions below 50 has been expanding and the numbers slowing have been relatively steady and in double digits. A good deal of weakness is pervasive but so far it is weakness of a more moderate variety with the overall average and median percentile standings around their 70% mark.